The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds, rose sharply during the Great Depression.

Question

BlackTom AI · Accepted Answer

Credit spread — the term for the difference between the yield on a corporate bond and the yield on a comparable-maturity U.S. Treasury bond.

1. Relevant knowledge points and concepts
- A credit spread measures the extra yield investors demand to hold a corporate bond instead of a risk-free Treasury; it reflects default risk, liquidity risk, and risk premia.
- Baa bonds are lower‑investment-grade corporates (higher default risk than Treasuries), so their yields include a credit premium.
- During crises (e.g., the Great Depression) investors flee to safety, raising Treasury demand and lowering Treasury yields while pushing up corporate yields, widening the credit spread.

2. Step‑by‑step reasoning
- Define the quantity: Credit spread = Yield on Baa corporate bond − Yield on U.S. Treasury bond.
- In the Great Depression, perceived default and liquidity risk for corporates increased, so required yields on Baa bonds rose.
- Simultaneously, Treasuries were seen as safe havens; heavy demand tended to lower their yields.
- The combined effect (higher Baa yields and lower or stable Treasury yields) increases the difference — i.e., the credit spread.

3. Example calculation (intermediate steps)
- Start: suppose initially Baa yield = 6%, Treasury yield = 3% → initial spread = 6% − 3% = 3 percentage points.
- During the Depression Baa yield rises to 12% and Treasury yield falls to 2% → new spread = 12% − 2% = 10 percentage points.
- Spread rose sharply from 3 to 10 percentage points, illustrating the phenomenon.

4. Why the correct answer is correct
- The prompt explicitly asks for “the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds.” That definition is exactly “credit spread.”

5. Why other options are incorrect
- b. credit boom: refers to a rapid expansion of lending, not a yield difference.
- c. default swap: likely intended to mean “credit default swap,” a derivative contract to insure default risk; not the definition of a yield difference.
- d. adjustable‑rate: an interest feature where rates reset periodically, irrelevant to the defined difference.

6. Conclusion
- The correct answer is a. credit spread, which matches the provided answer.

The ________, the difference between the interest rate on Baa corporate bonds and U.S. Treasury bonds, rose sharply during the Great Depression.Single choice

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