Question

As a generalization, investment grade bonds of fixed-rate CMBS deals are priced at a spread over (a) __________ rates, while the non-investment grade bonds are priced at a spread over (b) _______________rates.

Answer 1

Investment grade bonds of fixed-rate CMBS deals are priced at a spread over Treasury rates, and non-investment grade bonds are priced at a spread over corporate bond rates.

Step-by-step explanation:

Investment grade bonds of fixed-rate CMBS deals are priced at a spread over Treasury rates, while the non-investment grade bonds are priced at a spread over corporate bond rates.

For example, let's say the current Treasury rate is 2% and the current corporate bond rate is 4%. If an investment grade bond has a spread of 1% over Treasury rates, it would be priced at 3%. On the other hand, if a non-investment grade bond has a spread of 3% over corporate bond rates, it would be priced at 7%.

The spread is a way to compensate investors for taking on additional risk. Higher-quality bonds are generally considered less risky, so their spreads over lower-risk rates are smaller.