Question

Yield spreads refer to the difference in yield between a safe government bond and a risky corporate bond of the same maturity. Which of the following statements are true of the yield spread? Yields on safe government bonds are always higher than yields on risky corporate bonds, The yield spread does not change over the business cycle, The yield spread does not change over the business cycle, or all statements are true

Answer 1

Only this statement is true - yield spread refers to the difference in the yields of a Corporate bond and a safe governement bond of the same maturity.

Why other statements are false?

1. Yield on Corporate bonds are always higher than yield on government bonds because Corporate bonds have to pay higher interest due to higher risk.

2. Yield spreads do change because of the business cycle because during the periods for example- during recession Corporates have to pay higher interest because of higher default risk thus affecting yield spread

I hope this makes sense

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