We would expect the relationship between the risk spread on Baa bonds and U.S. Treasury securities of similar maturities to:
A) Vary directly with economic growth
B) Show no variation over the business cycle
C) Vary inversely with economic growth
D) Breakdown with economic growth

Question

Quizplus · Accepted Answer

The risk spread on Baa bonds and U.S. Treasury securities of similar maturities would vary inversely with economic growth. When economic growth is strong, default risk is low, and investors are willing to accept a lower risk premium, leading to a decrease in the risk spread. On the other hand, during economic downturns, default risk increases, and investors demand a higher return for taking on more risk, causing the risk spread to increase.

We Would Expect the Relationship Between the Risk Spread on Baa