hard · Corporate Credit Analysis
A corporate issuer has a BB+ rating but its bonds trade at a spread implying a 30% five-year cumulative PD.
If the historical BB five-year PD is 9%, what is the most likely explanation for this discrepancy according to the risk-neutral pricing framework?
- The bond's liquidity is so high that it suppresses the spread.
- The company's recovery rate is expected to be higher than average.
- Rating agencies have failed to downgrade a deteriorating credit.
- The market spread reflects a risk-neutral PD that includes a risk premium.
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