Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: $\begin{array}{ll}
\text { T-bond }=7.72 \% & \mathrm{~A}=9.64 \% \
\mathrm{ALA}=8.72 \% & \mathrm{BBB}=10.18 \%
\end{array}$ The differences in rates among these issues were most probably caused primarily by:

Question

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The differences in interest rates among these bonds are primarily due to default risk differences. T-bonds, being government securities, have virtually no default risk, while corporate bonds (A, ALA, BBB) carry higher default risks, which are reflected in their higher interest rates. The ratings (A, ALA, BBB) indicate the level of default risk, with lower-rated bonds offering higher yields to compensate for higher risk.

Assume That Interest Rates on 15-Year Noncallable Treasury and Corporate T-bond =7.72% A=9.64%ALA=8.72%BBB=10.18%\begin{array}{ll}\text { T-bond }=7.72 \% & \mathrm{~A}=9.64 \% \\\mathrm{ALA}=8.72 \% & \mathrm{BBB}=10.18 \%\end{array} T-bond =7.72%ALA=8.72%​ A=9.64%BBB=10.18%​

Assume That Interest Rates on 15-Year Noncallable Treasury and Corporate $\begin{array}{ll}\text { T-bond }=7.72 \% & \mathrm{~A}=9.64 \% \\\mathrm{ALA}=8.72 \% & \mathrm{BBB}=10.18 \%\end{array}$