EC223 Study Guide - Quiz Guide: Risk Premium, Corporate Bond, Business Cycle
Document Summary
Economics of the canadian banking and financial system. Which should have the highest risk premium on its interest rates, a corporate bond with an. The bond with a c rating should have a higher interest rate because it has a higher default risk, which reduces its demand and raises its interest rate relative to that on the bbb bond. Risk premiums on corporate bonds are usually anti-cyclical; that is, they decrease during business cycle expansions and increase during recessions. During business cycle booms, fewer corporations go bankrupt and there is less default risk on corporate bonds, which lowers their risk premium. Similarly, during recessions, default risk on corporate bonds increases and their risk premium increases. The risk premium on corporate bonds is thus anti-cyclical, rising during recessions and falling during booms.
