Question

Which of the following is NOT a way to measure default risk?

A. Credit ratings

B. Discriminant Analysis

C. Examining yield spreads

D. Technical Analysis

E. All of the above ARE ways to measure default risk.

Answer 1

Technical analysis is used to predict the future stock movements by the use of charts and graphs. So, it helps stock price forecasting rather than to measure default risk.

Credit ratings are ratings assigned to bonds to measure the degree of default risk in the bonds, the investment grade bonds are least risky and the junk bonds are more riskier and are subject to default.

Examining the yield spreads: as the yield spreads widen the default risk rises, as the issuers are giving higher yield o compensate for the risk in the bonds. As yield spreads narrows down, the default risk falls.Yield spread is the difference in the yield of a treasury bond and a corporate bond.

The Discriminant analysis is also used to measure the default risk.

So, the correct option is option D.