The collapse of the subprime mortgage market increased the spread between Baa and default-free Canada bonds. This is due to ________.
A) a reduction in risk
B) a reduction in maturity
C) a flight to quality
D) a flight to liquidity

Question

Quizplus · Accepted Answer

A flight to quality occurs when investors move their investments from higher-risk to lower-risk assets. In this case, the collapse of the subprime mortgage market increased the riskiness of certain types of bonds, causing investors to shift their investments towards safer assets such as default-free Canada bonds. This increased demand for safer assets caused the spread between Baa and default-free Canada bonds to widen.

The Collapse of the Subprime Mortgage Market Increased the Spread