(a) Draw two graphs side-by-side. In the graph on the left, draw the market for corporate bonds. In the graph on the right, draw the market for Treasury bonds. Label the axes, all curves, and the initial equilibria (E1). The initial equilibria should reflect a positive risk premium for corporate bonds. 

(b) Suppose savers lose faith in the reliability of credit rating agencies. That is, they no longer trust the accuracy of their ratings. In the graphs above, draw how this loss of confidence affects these market(s).

(c) As a result of the change described in (1b), will the risk premium increase, decrease, or is it ambiguous?

Answer rating: 100% (QA)

The smallfirm effect is the anomaly that risk premiums ... View the full answer