Assume that the yield on long-term U.S. government bonds rises. The yield on corporate bonds with the same maturity will __________, because investors will substitute __________ for __________.
A) rise; government bonds; corporate bonds
B) rise; corporate bonds; government bonds
C) fall; government bonds; corporate bonds
D) fall; corporate bonds; government bonds

Question

Quizplus · Accepted Answer

When the yield on long-term U.S. government bonds rises, the yield on corporate bonds with the same maturity will also rise. This is because investors will substitute government bonds for corporate bonds, seeking the higher yield offered by the government bonds. This substitution effect puts upward pressure on corporate bond yields, as issuers must offer a higher yield to attract investors.

Assume That the Yield on Long-Term U