An increase in the riskiness of corporate bonds will ________ the yield on corporate bonds and ________ the yield on government securities, everything else held constant.
A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase

Question

Quizplus · Accepted Answer

An increase in riskiness of corporate bonds will lead to investors demanding a higher yield to compensate for the increased risk. This means that the yield on corporate bonds will increase. On the other hand, investors may shift their investments from corporate bonds to safer government securities, increasing demand and driving the yield on government securities down. Therefore, the yield on government securities will reduce.

An Increase in the Riskiness of Corporate Bonds Will ________