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Suppose a client observes the following two nominal spreads for two bonds: Bond issue U rated A: 150 basis points Bond issue V rated BBB:
Suppose a client observes the following two nominal spreads for two bonds: Bond issue U rated A: 150 basis points Bond issue V rated BBB: 135 basis points Your client is confused because he thought the lower-rated bond (bond V) should offer a higher benchmark spread than the higher-rated bond (bond U). Explain why the benchmark spread may be lower for bond U. Assume that the two bonds have the same maturity.
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