Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15 percent AAA Corporate bonds = 6.2 percent BBB
The main reason for the differences in the interest rates is:

Question

Quizplus · Accepted Answer

The difference in interest rates between U.S. Treasury bonds and AAA or BBB corporate bonds is primarily due to the default risk premium. U.S. Treasury bonds are considered risk-free in terms of default, while corporate bonds carry a risk of default, which is higher for BBB rated bonds compared to AAA rated bonds. This risk is compensated by higher interest rates on corporate bonds.

Assume That You Observe the Following Rates on Long-Term Bonds