The CDS-Bond Basis Is the Difference in Credit Spreads in the CDS

question 19

Multiple Choice

The CDS-Bond basis is the difference in credit spreads in the CDS and bond markets, i.e., CDS spread minus the bond spread. Which of the following scenarios will make the basis greater, i.e., move it in the positive direction?

• A) The bond market becomes illiquid relative to the CDS market.
• B) The demand for convertible bonds increases, as does the need to hedge the credit risk in these bonds.
• C) The market for synthetic CDOs heats up.
• D) The bond price moves down sharply.

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