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Risk premium on corporate bonds are usually anticyclical (or countercyclical); that is, they decrease during business...

Risk premium on corporate bonds are usually anticyclical (or countercyclical); that is, they decrease during business cycle expansions and increase during recessions. Why is this so? Explain using the bond demand and supply framework.

Note: Please provide the graphs

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Answer #1
  • Risk premium on bonds are anticyclical as they decrease during business cycle expansions and increase during recession.
  • As we know,Market crashes happen in recession.Market gave you negative returns in those years but bonds are stable and have more preference over market investments.
  • When businesses boom,they grow rapidly.Stock Market increases rapidly and thus people feel to invest in shares instead of bonds.That's why they have less risk premium during boom period.


    Note:Please consider my apology as sharing of graphs from other sources will be counted as plagiarism.Kindly upvote if it helped you.
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