A permanent increase of borrowing by the U.S. Treasury to finance growing budget deficits will:
A) result in U.S. Treasury yields being higher than high-grade corporate bonds.
B) result in the price of U.S. Treasury bonds rising.
C) cause the yield on U.S. Treasury bonds to increase, but still be lower than corporate bonds.
D) result in lower yields on corporate bonds.

Question

Quizplus · Accepted Answer

When there is a permanent increase in borrowing by the U.S. Treasury to finance growing budget deficits, the yield on U.S. Treasury bonds tends to increase. However, as long as the U.S. government is considered to be a less risky borrower compared to corporations, the yield on U.S. Treasury bonds will still be lower than corporate bonds. Therefore, option C is the best choice. Option A is incorrect as higher yields on U.S. Treasury bonds than on corporate bonds is unlikely to occur in this scenario. Option B is also incorrect since a rise in Treasury bond prices would result in lower yields. Option D is not a plausible outcome, as the increase in Treasury bond yields would not necessarily result in lower yields on corporate bonds.

A Permanent Increase of Borrowing by the U