We would expect the risk spread between Baa bonds and U.S. Treasury securities of the same maturities to:
A) widen during periods of economic recession.
B) remain relatively constant over the business cycle.
C) decrease during economic slowdowns.
D) increase during economic growth periods.

Question

Quizplus · Accepted Answer

During periods of economic recession, investors become more risk-averse and concerned about the creditworthiness of borrowers, causing the demand for riskier bonds (Baa) to decrease. In turn, this causes the yield on Baa bonds to increase relative to Treasury securities, resulting in a widening of the risk spread between the two securities.

We Would Expect the Risk Spread Between Baa Bonds and U.S