Final answer:
Corporate bonds will yield higher returns as their risk increases, while Treasury securities will yield less due to their relative safety in the market. The answer is option d: an increase in the yield on corporate bonds and a reduction in the yield on Treasury securities.
Step-by-step explanation:
An increase in the riskiness of corporate bonds will increase the yield on corporate bonds and reduce the yield on Treasury securities, everything else held constant. Therefore, the correct answer is d. increase; reduce.
The reasoning behind this is that corporate bonds have a higher default risk compared to U.S Treasury bonds, which are considered virtually risk-free, as they are backed by the full faith and credit of the U.S. government. As the risk associated with corporate bonds rises, investors demand higher yields for taking on the additional risk. Conversely, when corporate bond risk increases, Treasury securities become relatively more attractive due to their lower risk, which can lead to a decrease in yields as the demand for these safer investments increases.Moreover, a rise in the supply of bonds leads to a decline in interest rates because there are more bonds available than investors might be willing to buy, which forces bond issuers to offer higher yields to attract buyers.