Question

The phenomenon known as "flight to quality" causes yields on government bond and corporate bonds:

A. to rise in tandem.
B. to fall in tandem.
C. to move in opposite directions
D. to become less volatile.

Answer 1

The phenomenon known as 'flight to quality' causes yields on government bond and corporate bonds to move in opposite directions.

Step-by-step explanation:

The phenomenon known as "flight to quality" causes yields on government bond and corporate bonds to move in opposite directions. When investors have concerns about the stability of the economy or financial markets, they tend to seek the safety of government bonds, resulting in an increase in demand for them. This increase in demand drives down the yields on government bonds. At the same time, investors may sell off riskier corporate bonds and move their money into government bonds, leading to a decrease in demand for corporate bonds and an increase in their yields.