As a result of the subprime collapse, the demand for low-quality corporate bonds ___, the demand for high-quality Treasury bonds _, and the risk spread ___

Business Feb 02, 2021

As a result of the subprime collapse, the demand for low-quality corporate bonds _____, the demand for high-quality Treasury bonds _____, and the risk spread _____.

a. decreased; increased; was unchanged

b. increased; decreased; was unchanged

c. increased; decreased; decreased

d. decreased; increased; increased

Expert Solution

Answer: D

During the subprime collapse where risk levels rose, there was a rush into high-quality bonds such as Treasuries and a rush out of low-quality bonds such as some corporate bonds. This meant that the demand for low-quality corporate bonds decreased and the demand for high-quality Treasury bonds increased. This means the risk spread rose as the difference in return on risky and non-risky assets rose.

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