The US treasury isn\'t the only issuer of bonds. Corporations also issue bonds t

Question

1. The US treasury isn't the only issuer of bonds. Corporations also issue bonds that have future payment structures like U.S. Treasuries. Of course, unlike the federal government, corporations can go bankrupt, leaving their bondholders unable to collect all of their scheduled payments. Because of this risk of default, corporate bonds must have a higher yield in equilibrium than similarly structured Treasury bonds. Under what economy-wide economic conditions, if any, might you expect to see corporate bond yields rise while Treasury Bond yields fell?

Explanation / Answer

Under what economy-wide economic conditions, if any, might you expect to see corporate bond yields rise while Treasury Bond yields fell?

Corporate yields will generally rise when inflation is rising and prices are falling. Also, when the economy is doing well and the stock market is providing a higher return, the corporate bonds will usually have to increase their rates to entice investors who would otherwise invest in the stock market.

Of these reasons, in a good economy with rising inflation is when we would expect corporate bonds to rise. Wheras the T bills will not rise if the government is taking in revenue and producing a surplus. This is because with a surplus government will not need to borrow as much and the interest rates will not rise since the demand will be lower.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.