Question

If a corporate bond becomes less liquid, the interest rate on the bond will fall. (II) If a corporate bond becomes less liquid, the interest rate on Treasury bonds will fall.

(a) (1) is true, (II) false.
(b) (1) is false, (II) true.
(c) Both are true.
(d) Both are false.

Answer 1

If a corporate bond becomes less liquid, its interest rate will typically rise. The liquidity of a corporate bond does not directly impact the interest rate on Treasury bonds.

Step-by-step explanation:

The statement (I) is false and the statement (II) is true.

When a corporate bond becomes less liquid, its interest rate will typically rise, not fall. This is because a less liquid bond is considered riskier for investors, and investors will demand a higher interest rate to compensate for the higher risk.

However, the liquidity of a corporate bond does not directly impact the interest rate on Treasury bonds. The interest rate on Treasury bonds is influenced by a variety of factors, including overall market conditions, inflation expectations, and the supply and demand for Treasury bonds.