Question

Holding all other factors constant, the most likely effect of low demand and heavy new issue supply on bond yield spreads is that yield spreads will:

1) Increase
2) Decrease
3) Remain unchanged
4) Cannot be determined

Answer 1

Low demand and heavy new issue supply on bond yield spreads will likely increase yield spreads.

Step-by-step explanation:

Holding all other factors constant, low demand and heavy new issue supply on bond yield spreads will likely increase yield spreads. When there is low demand for bonds and a high supply of new bond issues, investors will demand higher yields to compensate for the increased risk. This increased yield spread reflects the higher interest rate investors require to invest in bonds with low demand and heavy new issue supply.