The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury 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

The collapse of the subprime mortgage market led investors to lose faith in risky investments, causing a "flight to quality," where they sought safer investments such as default-free U.S. Treasury bonds. This increased the demand for Treasury bonds, causing their prices to rise and their yields to fall, resulting in a wider spread between Baa bonds (which have higher risk of default) and Treasury bonds.

The Collapse of the Subprime Mortgage Market Increased the Spread