Amalgamated Corp. and Widget Corp. each have bonds outstanding with similar coupons and maturity dates. Both bonds
Question:
Amalgamated Corp. and Widget Corp. each have bonds outstanding with similar coupons and maturity dates. Both bonds are rated B2, B−, and B by Moody’s, S&P, and Fitch, respectively. The bonds, however, trade at very different prices—the Amalgamated bond trades at €89, whereas the Widget bond trades at €62. What is the most likely explanation of the price (and yield) difference?
A. Widget’s credit ratings are lagging the market’s assessment of the company’s credit deterioration.
B. The bonds have similar risks of default (as reflected in the ratings), but the market believes the Amalgamated bond has a higher expected loss in the event of default.
C. The bonds have similar risks of default (as reflected in the ratings), but the market believes the Widget bond has a higher expected recovery rate in the event of default.
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