Which of the following scenarios is most likely to lead to an increase in a firm's credit spreads?
A)The firm's assets increase in value and the volatility of its assets also increases.
B)The firm's assets increase in value and the volatility of its assets decreases.
C)The firm's assets decrease in value and the volatility of its assets increases.
D)The firm's assets decrease in value and the volatility of its assets decreases.

Question

Quizplus · Accepted Answer

A decrease in the value of a firm's assets and an increase in the volatility of its assets both increase the likelihood of default and lower investor confidence, leading to higher credit spreads. Option A is incorrect because an increase in asset value is typically viewed positively and would typically lead to tighter credit spreads. Option B is incorrect because lower asset volatility would also typically lead to tighter credit spreads, as it implies less risk. Option D is incorrect as a decrease in asset value and a decrease in asset volatility both imply less risk and would lead to tighter credit spreads.

Which of the Following Scenarios Is Most Likely to Lead