Question

Which reduces the credit risk spread paid by a corporate borrower? a) fewer covenants b) lower coverage ratio c) lower leverage ratio d) more volatile business Answer is A, B and D. Please explain.

Answer 1

Credit Risk Spread will increase for the corporate borrower if there will be more credit risk for the firm,

Here,

1.

Fewer Covenants will lessen restriction on firm related to debt so the risk increases, and so the credit risk spread increases.

2.

Lower coverage ratio also increases the risk to the firm and so the credit risk spread increases

3.

If business will be volatile, then profit will be unsustainable and so the risk will increase which will increase credit risk spread.