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Which of the following statements regarding a quality spread differential are true? (Select all that apply)

a. It is the difference between the default-risk premium differential on the fixed-rate debt and the default-risk premium differential on the floating rate debt.
b. It is not possible for all parties to have a positive quality spread differential.
c. It is the sum of the default-risk premium differential and the fixed-rate debt divided by the default-risk premium differential on the floating rate debt.
d. None of the options.

User Nayyara
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Final answer:

The quality spread differential (QSD) is the difference in default-risk premiums between different types of debt, typically fixed-rate and floating-rate. The correct statements regarding QSD are that it is the difference between default-risk premiums on different debt types and that not all parties can have a positive QSD.

Step-by-step explanation:

A quality spread differential (QSD) refers to the difference in the default-risk premiums between two types of debt, which usually involves fixed-rate and floating-rate debt instruments. Essentially, it reflects the additional yield an investor demands for taking on the additional credit risk of a bond with a lower credit quality compared to one with higher credit quality.

Regarding the given statements:

a. This statement is correct. The QSD is indeed the difference between the default-risk premium on fixed-rate debt and the default-risk premium on floating-rate debt.

b. This statement is also true. It is not always possible for all parties in the financial markets to achieve a positive quality spread differential, as it relies on differential movements in the spreads of various debt instruments.

c. This statement is false. The quality spread differential is not a sum divided by a differential; it's the simple difference between the default-risk premiums of two debts.

Therefore, the correct statements regarding quality spread differential are a and b.

User Dmytro Nesteriuk
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