Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18%
What were the differences in rates among these issues most probably caused by?

Question

Quizplus · Accepted Answer

The differences in rates among these issues are most probably caused by default risk differences. Corporate bonds have a higher default risk than Treasury bonds, and the difference in rates between the different corporate bond ratings reflect the differences in default risk among them.

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