Question

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Q1. Briefly describe the difference in bond markets in general and stock markets in the context of investment and return. Why is corporate bond investment usually riskier than the investing in US Treasury securities? Q2. During recession, the yield for corporate bonds tends to increase and the yield for US Treasury securities tends to decrease. Briefly explain why. Give a real-world example as part of your reasoning.

Answer 1

Q.1) Bonds market provide defined fixed return but the returns usually low and in stock market returns like dividend are not fixed and returns could range from negative to positive based on the performance of individual stocks. However it provides higher return with higher risk in investment.
Corporate bonds are riskier than US treasury securities because risk of default in corporate bonds are lot higher than in Us treasury Securities. This is because govt can pay back its obligations by taxing its citizens.

Q2) During recession Companies fail and tend to default in their payment so demand for corporate bonds decreases and so yield also increases, Government's paying capacity is not affected by recession . Hence people prefer Treasury and their demand goes up increasing their price and decreasing the Yield.

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