Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: The differences in rates among these issues were most probably caused primarily by:

Question

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows:  The differences in rates among these issues were most probably caused primarily by:

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The differences in rates among these issues are most likely caused by default risk differences. Treasury bonds are considered to carry the lowest default risk as they are backed by the government. Corporate bonds, on the other hand, are issued by companies that are subject to default risk. The higher the default risk of the company, the higher the interest rate they will have to pay to attract investors. Therefore, the differences in rates among the bonds with different ratings are most likely due to differences in default risk.

Assume That Interest Rates on 20-Year Treasury and Corporate Bonds