Question

Predict what will happen to interest rates on a corporation’s bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the interest rates on Treasury securities?

Short answer

Lower interest rates on corporate bonds and higher interest rates on government securities will arise from increased demand for corporate bonds and decreased demand for treasury securities.

Step-by-step solution

Introduction

A bond is a fixed amount of income investment that is given to an entity for a specific length of time.

Treasury securities are the bonds issued by the United States government. These securities have varying maturities, with Treasury Bills being the issuance having the shortest maturity.

To determine

Interest rates on corporate bonds and Treasury securities are affected.

Explanation

After the government guarantees corporate debts, the danger of default will be decreased, making these bonds more desirable to the public. The demand for corporate bonds will rise as a result of this.

Lower interest rates on corporate bonds and higher interest rates on government securities will arise from increased demand for corporate bonds and decreased demand for treasury securities.