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Question 2-30I

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Essentials Of Investments
Found in: Page 52
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

What would you expect to happen to the spread between yields on commercial paper and Treasury bills if the economy were to enter a steep recession?

The spread will widen

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Step by Step Solution

Definition

The short term unsecured debt issued by large corporation is known as Commercial paper. Treasury bills are short term debts (of one year or less) backed by government.

Explanation

If the economy were to enter into a steep recession, the spread will widen. Poor performance of the economy increases credit risk, i.e. the likelihood of default. In this case, investors will demand a greater premium on debt securities subject to default risk.

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