The U.S. government just announced an increase in the interest rate paid on U.S. government bonds. This will likely cause a decrease in the interest rates paid on corporate bonds.

Question

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The interest rate being paid by U.S. government bonds impacts the interest rate a firm must agree to pay since government bonds are considered to be very safe investments. Corporate bonds would be considered riskier. The risk/return trade-off states that investors demand higher interest rates in order to accept higher risk levels.

The US Government Just Announced an Increase in the Interest Rate