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The spread between the interest rates on Baa corporate bonds and U.S. government bonds is very large during the Great Depression years 1930-1933. Explain this difference using the bond supply and demand analysis.

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Answer:

During the Great Depression many businesses failed.  The default risk for the corporate  bond increased compared to the default-free Treasury bond.  The demand for corporate bonds decreased while the demand for Treasury bonds increased resulting in a larger risk  premium.

Explanation: