Question

1. You’ve noticed the yield spread between AAA corporate bonds and Treasury bonds has increased in recent months. Which of the possible explanations is least likely to cause this to occur?

		Investors have become more risk averse
		Congress is debating a cut in spending and borrowing
		Investors are rushing toward quality
		The Federal Reserve has been selling Treasury bonds

Answer 1

When the yield spread between corporate bonds and the treasury bonds have increased, it will mean that there is a high level of risk aversion in the market because investors have become more sceptical of a recessionary situation in the economy and increase of Yield spread is a significant signal of that because there is a higher risk and higher concern about growth of the corporates and higher risk on the survival of the Corporates.

All the other options are false.

Correct answer will be option (A) investors have become more risk averse.