The Measured Credit Spread Widens as You Move into Lower

question 24

Essay

The measured credit spread widens as you move into lower and lower quality bonds i.e., the spread between long-term T-bonds and BBB bonds is higher than the spread between long-term T-bonds and AAA bonds. Where do you generally find the largest increase in the credit spread due to a single step down in credit rating? Explain.

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Definitions:

Taste-for-Discrimination Model

An economic theory that explains how personal bias can lead to discrimination in hiring and wage decisions.

Discrimination Coefficient

A statistical measure used to analyze the degree of differentiation between variables or groups.

Market Wage Rate

The prevailing rate of pay for a particular job in the competitive labor market.

Labor Market Discrimination

Unfair treatment of workers based on race, gender, age, religion, or other non-economic factors, affecting their employment opportunities and wages.