The increase in yield spreads in late 2008 and early 2009 indicated that
A) Credit risk premiums decreased
B) Market risk premiums increased
C) Investors are more confident of the future cash flows of bonds
D) Non-investment grade bonds are less risky
E) Government bonds are no longer a risk free investment

Question

Quizplus · Accepted Answer

Yield spreads are the difference between the yields on different types of bonds, such as corporate bonds and government bonds. An increase in yield spreads indicates that investors perceive corporate bonds as being riskier than government bonds, which means that market risk premiums have increased. This can happen during times of economic uncertainty or financial crisis when investors are more risk-averse and demand higher returns for taking on investment risks.

The Increase in Yield Spreads in Late 2008 and Early