Which of the following supply and demand models for bonds issued by company X represents what happens when the default risk increases for company X?

Question

Quizplus · Accepted Answer

In model C, the demand curve shifts to the left, indicating a decrease in demand for company X bonds. This is because investors will demand a higher yield to compensate for the increased default risk. The supply curve shifts to the right, indicating an increase in the supply of bonds from company X as they attempt to raise funds to overcome their financial difficulties. This shift in curves is consistent with an increase in default risk for company X.

Which of the Following Supply and Demand Models for Bonds