Question

Based on your understanding of bond ratings and bond-rating criteria, which of the following statements is true? During a period of economic growth and in an optimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during an economic recession and a pessimistic environment. During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times. In 2008, the United States began to witness one of the worst recessions since the 1930s. The collapse of the housing bubble in 2006 led to a massive decline in real estate prices, affecting consumers and institutions, especially banking and financial entities. Severe liquidity shortfalls in the United States as well as other global markets led to a serious credit crisis. During the credit crisis of 2008–2009, several banks and other businesses went through a reorganization process or were forced to liquidate. Consider the following example: In December 2008, Hawaiian Telcom took action to strengthen its balance sheet by reducing debt. Although the company continued to operate, its creditors could not collect their debts or loan payments that were due prior to the legal action that the company took. However, on November 30, 2009, the company had $75 million in cash on hand. This is an example of: Liquidation Reorganization

Answer 1

Answer: 1. During an economic recession and in a pessimistic environment, the yield spread between US government bonds and corporate bonds could be higher than during good economic times.

2. Reorganization

Explanation:

1. When there is a higher yield gap between the US Government bonds and Corporate bonds, this means that the Corporate bonds carry more risk. In a Pessimistic Environment, the ability of a company to pay it's Debt obligations is called into question as the economy is going through hard times and they must be as well. If this is the case which it usually is, higher risk will be attached to Corporate bonds which means that the yield spread/gap will be higher in such an environment than in an Optimistic environment.

2. Reorganization refers to the changing of the way a company is run from it's ownership to it's structure and modus operandi. It is usually done to ensure the business survives when it is going through hard times and the current status quo cannot stand. Hawaiian Telecom engaged in Reorganization by engaging in the actions described.