If the current yields on three-year corporate bonds are 7% per annum and on the same day the yield in the futures market for comparable bonds is 6.50% per annum,the interest rate difference is due to:
A) business risk.
B) basis risk.
C) credit risk.
D) financial risk.

Question

Quizplus · Accepted Answer

The interest rate difference in this scenario is due to basis risk, which refers to the risk that the futures contract price might not move in the same direction as the cash bond market. Therefore, the difference between the yield on the three-year corporate bonds and the yield in the futures market is attributed to basis risk. Business risk, credit risk, and financial risk are not relevant in this case.

If the Current Yields on Three-Year Corporate Bonds Are 7