1. How does the reduced liquidity of the corporate bonds affect their interest rates relative to the interest rate on Treasury bonds? Illustrate and explain thoroughly

 

2. Could you help explain what the labels in the graphic below mean ( for example Pc1, Pc2 and so on )? Kindly explain the illustration below as well. Provide an example and explain

Transcribed Image Text:

Price of Bonds, P PG Pº Step 1. An increase in default risk shifts the demand curve for corporate bonds left... Sc Dº Dº Quantity of Corporate Bonds (a) Corporate bond market Risk Premium 1/2 192 Step 3. which raises the price of Treasury bonds and lowers the price of corporate bonds, and therefore lowers the interest rate on Treasury bonds and raises the rate on corporate bonds, thereby increasing the spread between the interest rates on corporate versus Treasury bonds. Price of Bonds, P T2 P2₂2 PT Step 2. and shifts the demand curve for Treasury bonds to the right... ST * DI 72 D/2 Quantity of Treasury Bonds (b) Default-free (U.S. Treasury) bond market Price of Bonds, P PG Pº Step 1. An increase in default risk shifts the demand curve for corporate bonds left... Sc Dº Dº Quantity of Corporate Bonds (a) Corporate bond market Risk Premium 1/2 192 Step 3. which raises the price of Treasury bonds and lowers the price of corporate bonds, and therefore lowers the interest rate on Treasury bonds and raises the rate on corporate bonds, thereby increasing the spread between the interest rates on corporate versus Treasury bonds. Price of Bonds, P T2 P2₂2 PT Step 2. and shifts the demand curve for Treasury bonds to the right... ST * DI 72 D/2 Quantity of Treasury Bonds (b) Default-free (U.S. Treasury) bond market

Answer rating: 100% (QA)

How reduced liquidity affects corporate bond interest rates Corporate bonds are generally less liquid than Treasury bonds meaning that they are harder ... View the full answer