Homework Answers
As observed in the graph, in the event of default, the risk premium between the Canadian debt and comparable maturity Greek debt would increase, which corresponds to segment B on the graph above.
It shall be noted that the higher the risk of default, the higher is the risk premium.
It shall further be noted that a default risk premium is effectively the difference between a debt instrument's interest rate and the risk-free rate.
Hence, the correct answer is - B. the risk premium would increase, which corresponds to the segment B on the graph above.
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