The risk premium on corporate bonds becomes smaller if
A) the riskiness of corporate bonds increases.
B) the liquidity of corporate bonds increases.
C) the liquidity of corporate bonds decreases.
D) the riskiness of corporate bonds decreases.
E) either B or D of the above occur.

Question

Quizplus · Accepted Answer

The risk premium on corporate bonds decreases if the liquidity of the bonds increases or if the riskiness of the bonds decreases. Increased liquidity makes the bonds more attractive to investors, reducing the premium required to compensate for risk. Similarly, a decrease in riskiness directly reduces the risk premium required by investors.

The Risk Premium on Corporate Bonds Becomes Smaller If