Suppose that information costs fall with respect to medium-quality corporate bonds. The result will be that the prices of medium-quality corporate bonds will
A)fall relative to the price of U.S. Treasury securities, but rise relative to the price of high-quality corporate bonds.
B)rise relative to the price of U.S. Treasury securities, but fall relative to the price of high-quality corporate bonds.
C)rise relative to the prices of U.S. Treasury securities and high-quality corporate bonds.
D)fall relative to the prices of U.S. Treasury securities and high-quality corporate bonds

Question

Quizplus · Accepted Answer

When information costs fall for medium-quality corporate bonds, it becomes easier and cheaper for investors to assess their value, reducing the risk premium demanded by investors. This increased demand leads to higher prices for these bonds relative to both U.S. Treasury securities, which are considered risk-free, and high-quality corporate bonds, as the perceived risk gap narrows.

Suppose That Information Costs Fall with Respect to Medium-Quality Corporate