Everything else held constant,if the expected return on U.S. Treasury bonds falls from 8 to 7 percent and the expected return on corporate bonds falls from 10 to 8 percent,then the expected return of corporate bonds ________ relative to U.S. Treasury bonds and the demand for corporate bonds ________.
A)rises;rises
B)rises;falls
C)falls;rises
D)falls;falls

Question

Quizplus · Accepted Answer

When the expected return on U.S. Treasury bonds falls from 8 to 7 percent, the demand for corporate bonds will increase as investors will seek higher returns elsewhere. However, since the expected return on corporate bonds also falls from 10 to 8 percent, the relative return of corporate bonds to U.S. Treasury bonds will fall, making corporate bonds less attractive to investors. Therefore, the expected return of corporate bonds falls relative to U.S. Treasury bonds and the demand for corporate bonds falls as well.

Everything Else Held Constant,if the Expected Return on U