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Good day tutor,
I have this phrase (below) written in my notes a couple months ago which I forgot where it was copied from:
“If credit spreads are too high, debt will have to be issued at a premium. If credit spreads are too low, it will have to be issued at a discount as there may not be a full take up”
Could you kindly assess if this is correct? Wouldn’t higher yields produce a lower priced bond? Also, isn’t yield calculated after the price of the bond to be issued at has been determined? Hence it is the interest rate on the bond that determines whether the bond will be issued at discount/ premium?
The statement is true.
It is the yield (i.e. return) that the investors require that determines the market price.
So if they are wanting a high yield, then the issue price will have to be low. If they are happy to accept a low yield, then the issue price can be high.The yield that they require depends on the yield that they could get from other investments.
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