What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?Question 8Select one:a.no change, as both yields will remain the sameb.increase, as the spread usually increases in response to a crisisc.decrease, as the spread usually decreases in response to a crisisd.no change, as both yields will move in the same direction
Question
What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?Question 8Select one:a.no change, as both yields will remain the sameb.increase, as the spread usually increases in response to a crisisc.decrease, as the spread usually decreases in response to a crisisd.no change, as both yields will move in the same direction
Solution
b. increase, as the spread usually increases in response to a crisis
This is because, in times of crisis, investors tend to move their money to safer investments. Treasury bills are considered safer than commercial paper because they are backed by the full faith and credit of the U.S. government. Therefore, the demand for Treasury bills increases, which drives down their yield. On the other hand, the demand for commercial paper decreases, which drives up its yield. As a result, the spread between the yields on commercial paper and Treasury bills would increase.
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