Bond risk premiums tend to go up during recessions, since default risk rises, and to go down during expansions when default risk for corporations fall.

Question

Quizplus · Accepted Answer

During a recession, firms are likely to experience financial difficulties and inability to service their debt, hence investors demand higher risk premiums as compensation for holding their bonds. Conversely, during an expansion, corporations have higher profits and cash flows, making it less risky for investors to buy their bonds.

Bond Risk Premiums Tend to Go Up During Recessions, Since