The spread between the yields on AAA-rated bonds and B-rated bonds tends to rise when yields increase.

Question

Quizplus · Accepted Answer

This is generally true because as yields increase, investors become more risk-averse and demand a higher return for holding riskier B-rated bonds compared to safer AAA-rated bonds. This increased demand for safer bonds causes their yields to stay relatively stable or even decrease, while the yields on riskier bonds increase, resulting in a wider spread between the two.

The Spread Between the Yields on AAA-Rated Bonds and B-Rated