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Question
Please use the graphs to show what happens to the risk (yield) differential in each situation and why?
Assume the corporate and Treasury bonds have the same maturity.
a) If the corporate bonds are default-risk free, what could you tell about the price and yields of each?
b) If the corporate bonds are now viewed as having the possibility of default, what happens in each market?
c) If the corporate bonds are granted tax-exempt status, what happens in each market?
d) If the corporate bonds have a longer maturity than the Treasury bonds what would happen?
Answer
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