Interest rate differentialsThe default risk premium at a certain point in time may be expressed by comparing the interest rates on:
A)a Treasury bill and a Treasury bond
B)a Treasury bill and a long-term corporate bond
C)a Treasury bill and the commercial paper rate
D)a risky security and a comparable maturity U.S.Treasury security

Question

Quizplus · Accepted Answer

The best choice for expressing default risk premium at a certain point in time is by comparing the interest rate on a risky security, such as a corporate bond or a municipal bond, with a comparable maturity U.S. Treasury security. This is because Treasury securities are considered risk-free, and any difference in the interest rate reflects the additional risk premium investors demand for holding a risky security. Comparing the interest rates on a Treasury bill and a long-term corporate bond or on a Treasury bill and the commercial paper rate may also provide some indication of default risk premium, but these comparisons may not be as reliable as comparing a risky security with a comparable maturity U.S. Treasury security. Comparing the interest rates on a Treasury bill and a Treasury bond is not relevant for measuring default risk premium, as both securities are considered risk-free.

Interest Rate DifferentialsThe Default Risk Premium at a Certain Point