Everything else held constant,if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future,the interest rate on corporate bonds will ________ and the interest rate on Treasury securities will ________.
A)increase;increase
B)increase;decrease
C)decrease;increase
D)decrease;decrease

Question

Quizplus · Accepted Answer

If the federal government were to guarantee that it will pay creditors if a corporation goes bankrupt in the future, it would decrease the perceived risk of investing in corporate bonds. This would lead to a decrease in the interest rate on corporate bonds. However, it would also increase the demand for Treasury securities as they are perceived as safer investments. This would lead to an increase in the interest rate on Treasury securities.

Everything Else Held Constant,if the Federal Government Were to Guarantee