If you lend money to the government by buying a one-year Treasury bill, your interest rate is 4%, but if you lend money to XYZ corporation by buying a one-year XYZ bond, you can earn 7%. What is the main reason for this difference in interest rates?

Question

Quizplus · Accepted Answer

The main reason for the difference in interest rates between the Treasury bill and the XYZ bond is due to the higher default risk on the XYZ bond. The government is considered to be a safer borrower than a corporation, and therefore, investors demand a higher return for taking on the additional risk.

If You Lend Money to the Government by Buying a One-Year