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

Question

Quizplus · Accepted Answer

The main reason for the differences in interest rates is due to default risk premium, as U.S. Treasury bonds are considered to have the lowest default risk, followed by AAA and BBB corporate bonds. The maturity and inflation risk premiums are typically the same across the different bond types. There is no convertibility premium in this case, as none of the bonds mentioned are convertible.

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