Question

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?
A. No change, as both yields will remain the same.

B. Increase, the spread usually increases in response to a crisis.

C. Decrease, the spread usually decreases in response to a crisis.

D. No change, as both yields will move in the same direction.

Answer 1

Answer:

The correct answer is option B.

Explanation:

Generally, during the crisis, it is observed that investment moves in the direction of safer assets. This causes their prices to go up and as a result, the yields go down. Treasury bill is considered safer as it is issued by the government. So, the price of treasury bills will increase and yields will go down.

At the same time, investment in commercial papers would decrease This will cause their price to fall and the yield will increase. This will further cause the difference or spread between the two yields.