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?

Question

Quizplus · Accepted Answer

When hedging demands increase as more buyers seek protection through CDS,the price (spread)on CDS increases.In contrast,for answer (a),when the bond market becomes illiquid,bond spreads increase.For (c)when the market for synthetic CDOs heats up,more CDS is issued,and the CDS spread falls.In (d),when the bond goes off the run,a higher spread is required to induce investors to buy the bond as it turns illiquid.

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