Question

In: Finance

You’ve noticed the yield spread between AAA corporate bonds and Treasury bonds has increased in recent...

  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

Solutions

Expert Solution

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.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Find the corporate yield spread if the 8-year Treasury rate is 3% and the 8-year corporate...
Find the corporate yield spread if the 8-year Treasury rate is 3% and the 8-year corporate bond rate is 8%.
During recession, the yield for corporate bonds tends to increase and the yield for US Treasury...
During recession, the yield for corporate bonds tends to increase and the yield for US Treasury securities tends to decrease .Briefly explain why. Give a real-world example as part of your reasoning.
A 5 year AA rated corporate bond has a nominal yield spread over a 5 year Treasury of 50 basis points.
A 5 year AA rated corporate bond has a nominal yield spread over a 5 year Treasury of 50 basis points. A 7 year BBB corporate bond has a nominal yield spread over the same treasury of 1.50%. Neither corporate bond has any embedded options. Please identify the risks that may explain the difference in the yield spreads of the AA and BBB bonds?
Consider the following yields to maturity on various one-year zero-coupon bonds; Treasury:4.85%, AAA corporate:5.075%, BBB corporate:5.9%,...
Consider the following yields to maturity on various one-year zero-coupon bonds; Treasury:4.85%, AAA corporate:5.075%, BBB corporate:5.9%, B corporate:6.55%. The credit spread of the B corporate bond is closest to: a. 0.225% b. 4.85% c. 1.05% d. 1.7%
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the...
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the yield on these same bonds had climbed to about 6 percent because the Reserve Bank of Australia increased interest rates during the year. Assume that BHP Billiton Limited issued a 10-year, 5 percent coupon bond one year ago (on 1 January). On the same date, Rio Tinto Limited issued a 20-year, 5 percent coupon bond. Both bonds pay interest annually. Assume that the market...
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the...
Last year, the yield on AAA-rated corporate bonds averaged approximately 5 percent; one year later, the yield on these same bonds had climbed to about 6 percent because the Reserve Bank of Australia increased interest rates during the year. Assume that BHP Billiton Limited issued a 10-year, 5 percent coupon bond one year ago (on 1 January). On the same date, Rio Tinto Limited issued a 20-year, 5 percent coupon bond. Both bonds pay interest annually. Assume that the market...
A BBB-rated corporate bond has a yield to maturity of 7.1 %. A U.S. treasury security has a yield to maturity of 5.2 %.
A BBB-rated corporate bond has a yield to maturity of 7.1 %. A U.S. treasury security has a yield to maturity of 5.2 %. These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 5.8 % and have five years to maturity.    a. What is the price (expressed as a percentage of the face value) of the treasury bond?b. What is the price (expressed as a percentage of the face value) of...
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____...
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. face value par value maturity coupon rate Victoria Tennis is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent...
A​ BBB-rated corporate bond has a yield to maturity of 10.1%. A U.S. treasury security has...
A​ BBB-rated corporate bond has a yield to maturity of 10.1%. A U.S. treasury security has a yield to maturity of 8.3%. These yields are quoted as APRs with semiannual compounding. Both bonds pay​ semi-annual coupons at a rate of 9.0% and have five years to maturity.     a. What is the price​ (expressed as a percentage of the face​ value) of the treasury​ bond? b. What is the price​ (expressed as a percentage of the face​ value) of the​ BBB-rated...
A BBB-rated corporate bond has a yield to maturity of 9.5%. A U.S. Treasury security has...
A BBB-rated corporate bond has a yield to maturity of 9.5%. A U.S. Treasury security has a yield to maturity of 7.6 %. These yields are quoted as APRs with semiannual compounding. Both bonds pay semi-annual coupons at a rate of 8.5%and have five years to maturity.     a. What is the price (expressed as a percentage of the face value) of the treasury bond? b. What is the price (expressed as a percentage of the face value) of the BBB-rated...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT