Assume that you observe the following rates on long-term bonds: U.S. Treasury bonds = 4.15%
AAA Corporate bonds = 6.2%
BBB Corporate bonds = 7.15%
The main reason for the differences in the interest rates is:

Question

Quizplus · Accepted Answer

The main reason for the difference in interest rates is the default risk premium, which is the additional return investors require to compensate for the risk of a borrower defaulting on their debt. U.S. Treasury bonds are considered virtually risk-free, while corporate bonds carry the risk of default, and therefore offer higher yields to investors. The difference in yields reflects the perceived risk of default between the different bond types. Maturity risk premium and inflation premium are factors affecting interest rates, but they are not the main reason for the differences observed here. Convertibility premium is not relevant in this scenario.

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