A bank holds a portfolio of corporate bonds. Corporate bond spreads widen, resulting in a loss of value for the portfolio. This loss arises due to:

The difference between the yields on corporate bonds and the risk free rate is called the corporate

bond spread. Widening of the spread means that corporate bonds yield more, and their yield curve

shifts upwards, driving down bond prices. The increase in the spread is a consequence of the market

risk from holding these interest rate instruments, which is a part of market risk. If the reduction in

the value of the portfolio were to be caused by a change in the credit rating of the bonds held, it

would have been a loss arising due to credit risk. Counterparty risk and liquidity risk are not relevant

for this question. Therefore Choice 'c' is the correct answer.