The risk spread is:
A) the difference between a bond's purchase price and selling price.
B) the difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity.
C) less than 0 (zero) for a U.S. Treasury bond.
D) assigned by a bond-rating agency.

Question

Quizplus · Accepted Answer

The risk spread is the difference between the bond's yield and the yield on a U.S. Treasury bond of the same maturity. This spread reflects the additional yield investors demand to compensate for the higher risk of default associated with the bond issuer compared to a U.S. government-backed bond. Option A is referring to the bond's capital gains or losses, which are not related to risk spread. Option C is incorrect because the risk spread can be positive or negative depending on market conditions and the creditworthiness of the bond issuer. Option D is referring to the bond's credit rating, which is an important factor in determining the risk of default, but not the risk spread.

The Risk Spread Is