Imagine a scandal that finds the officers of bond rating agencies have been taking bribes to inflate the rating of specific bonds. This should:
A) have no impact on the bond market since bond markets are highly efficient.
B) decrease the demand for all bonds.
C) increase the demand for U.S. Treasury securities and decrease the demand for corporate bonds.
D) decrease the risk spread.

Question

Quizplus · Accepted Answer

The scandal would shake investor confidence in corporate bonds and increase the perceived risk associated with them. As a result, investors would be more likely to turn to U.S. Treasury securities, which are seen as less risky. This would increase demand for Treasuries and decrease demand for corporate bonds. As a result, the spread between the yields on Treasuries and corporate bonds would likely widen.

Imagine a Scandal That Finds the Officers of Bond Rating