In 2010 and 2011, the government of greece risked defaulting on its debt due to a severe budget crisis. using bond market graphs, determine how default would affect the risk premium between u. s. treasury debt and greek debt with comparable maturity.

The demand for those bonds will fall, If the Greek government bonds become riskier. This leads to a decrease in Greek bond price correspondingly increasing the interest rates paid on them. On the other end, an increase in the riskiness in Greek government bonds means that nervous investors will switch to buying U.S. government bonds, correspondingly reducing the interest rates paid on them and propping up their prices. This will increase the risk premium as shown in the figure above

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