Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:
$\begin{array} { l l }
\text { T-6and =7.72\% }& \mathbf { A } = 9.64 \%\
\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.19 \%
\end{array}$
The differences in rates among these issues were most probably caused primarily by:
A) tax effects.
B) default risk differences.
C) maturity risk differences.
D) inflation differences.
E) real risk-free rate differences.

Question

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: 
$\begin{array} { l l } 
\text { T-6and =7.72\% }& \mathbf { A } = 9.64 \%\
\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.19 \% 
\end{array}$
The differences in rates among these issues were most probably caused primarily by:
A) tax effects.
B) default risk differences.
C) maturity risk differences.
D) inflation differences.
E) real risk-free rate differences.

Quizplus · Accepted Answer

The primary factor that causes differences in interest rates between Treasury and corporate bonds with different ratings is the difference in default risk. Corporate bonds carry a higher default risk than Treasury bonds. Therefore, investors demand a higher return on corporate bonds to compensate for the higher risk. The differences in interest rates due to tax effects or inflation differences are minimal. Maturity risk differences could play a minor role, but default risk is the most significant factor.

Assume That Interest Rates on 15-Year Noncallable Treasury and Corporate T-6and =7.72% A=9.64%AAA=8.72%BBB=10.19%\begin{array} { l l } \text { T-6and =7.72\% }& \mathbf { A } = 9.64 \%\\\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.19 \% \end{array} T-6and =7.72% AAA=8.72%​A=9.64%BBB=10.19%​

Assume That Interest Rates on 15-Year Noncallable Treasury and Corporate $\begin{array} { l l } \text { T-6and =7.72\% }& \mathbf { A } = 9.64 \%\\\mathrm { AAA } = 8.72 \% & \mathrm { BBB } = 10.19 \% \end{array}$