Assume that interest rates on 20-year Treasury and corporate bonds are as follows:
$\text { T-bond } = 7.72 \% \quad \text { AAA } = 8.72 \% \quad \text { A } = 9.64 \% \quad \text { BBB } = 10.18 \%$
The differences in these rates were probably caused primarily by:
A) Tax effects.
B) Default and liquidity risk differences.
C) Maturity risk differences.
D) Inflation differences.
E) Real risk-free rate differences.

Question

Quizplus · Accepted Answer

The differences in interest rates among Treasury bonds and various grades of corporate bonds (AAA, A, BBB) are primarily due to default and liquidity risk differences. Treasury bonds are considered risk-free in terms of default, whereas corporate bonds carry a higher risk of default as their rating decreases (from AAA to BBB). Additionally, Treasury bonds typically have higher liquidity compared to corporate bonds, making them more attractive to investors and allowing them to have lower interest rates.

Assume That Interest Rates on 20-Year Treasury and Corporate Bonds T-bond =7.72% AAA =8.72% A =9.64% BBB =10.18%\text { T-bond } = 7.72 \% \quad \text { AAA } = 8.72 \% \quad \text { A } = 9.64 \% \quad \text { BBB } = 10.18 \% T-bond =7.72% AAA =8.72% A =9.64% BBB =10.18%

Assume That Interest Rates on 20-Year Treasury and Corporate Bonds $\text { T-bond } = 7.72 \% \quad \text { AAA } = 8.72 \% \quad \text { A } = 9.64 \% \quad \text { BBB } = 10.18 \%$