Imagine a scandal that finds the officers of bond rating agencies have been taking bribes to inflate the rating of specific bonds. This should:
A) Have no impact on the bond market since bond markets are highly efficient
B) Decrease the demand for all bonds
C) Increase the demand for U.S. Treasury securities and decrease the demand for corporate bonds
D) Decrease the risk spread

Question

Quizplus · Accepted Answer

The scandal would likely reduce confidence in the accuracy and reliability of bond ratings, which would decrease demand for corporate bonds and increase demand for U.S. Treasury securities. This is because U.S. Treasuries are considered the safest investment and are not subject to bond ratings. The scandal would not have no impact on the bond market (A) as it would impact investor confidence, nor would it decrease demand for all bonds (B) as some bonds may not be affected by the scandal. It would also be unlikely to decrease the risk spread (D) as the scandal could increase perceptions of risk for specific bonds.

Imagine a Scandal That Finds the Officers of Bond Rating