Question

13) How does a decrease in the riskiness of corporate bonds affect the yield on corporate bonds and the yield on Treasury securities, everything else held constant?

Answer 1

For Bonds we always need to focus on 2 peculiar characterisitcs

1) Prices are inversely propotional to Yields

2) Riskiness increase the Bond Yield when Risk Premium is get added to the bond yield(Liquidity Prferences)

As Treasury Bonds are assumed to be Risk free bonds if riskiness of corporate bonds decreases it decrease the risk premium which in turn increase the price (As per point (1) mentioned above).This decrease in yield of corporate bonds will provide returns converging to that of tressury bonds assuming coporate bonds are comparable with treasury bond in rspect to maturity, coupon, and YTM.