(I)If a corporate bond becomes less liquid,the demand for the bond will fall,causing the interest rate to rise.
(II)If a corporate bond becomes less liquid,the demand for Treasury bonds does not change.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

Question

Quizplus · Accepted Answer

If a corporate bond becomes less liquid, investors may demand a higher return to compensate for the increased risk they are taking on. This higher return is reflected in a higher interest rate for the bond. However, the decrease in demand for a corporate bond does not necessarily translate to a change in demand for Treasury bonds, which are considered very safe and liquid investments. Therefore, statement (I) is true while statement (II) is false.

(I)If a Corporate Bond Becomes Less Liquid,the Demand for the Bond