The notching adjustment for corporate bonds rated Aa2/AA is most likely:
A) larger than the notching adjustment for corporate bonds rated b2/b.
B) the same as the notching adjustment for corporate bonds rated b2/b.
C) smaller than the notching adjustment for corporate bonds rated b2/b.

Question

Quizplus · Accepted Answer

The notching adjustment for corporate bonds rated Aa2/AA is smaller than the notching adjustment for corporate bonds rated b2/b because higher-rated bonds (Aa2/AA) are considered to have lower credit risk, thus requiring a smaller adjustment for differences in credit quality compared to lower-rated bonds (b2/b), which have higher credit risk and therefore require a larger adjustment to reflect the increased risk of default.

The Notching Adjustment for Corporate Bonds Rated Aa2/AA Is Most