Question

If there is an increase in the risk of default for corporate bonds, relative to US Treasury bonds, then we would expect that the demand curve for corporate bonds will _____ and the demand curve for US Treasury bonds will _____.

A) decrease; decrease

B) decrease; increase

C) increase; decrease

D) increase; increase

Answer 1

Decrease, Increase

( It is stated that, there is an increase in risk of default for corporate bonds compared to treasury bonds.

Each investor wishes to minimise his return from an investor. Increase in risk on Corporate bonds ruins his prospects of profits and puts him in a dilemma . He will want to purchase a bond with risk. In short, his demand for corporate bonds will face a decline. On the other hand, there are high chances of him purchasing treasury bonds just because of the fact that they carry only interest rate and inflation risk.

As a result, investors will start to purchase treasury bonds more and demand for the treasury bonds is gonna Increase over the time.On the other hand , demand for corporate bonds will fall. )