Why are the interest rates of Government of Canada notes less than the interest rates of equivalent corporate bonds?
A)The Canadian government has a high credit spread.
B)There is significant risk that the Canadian government will default.
C)Canadian government securities are widely regarded to be risk-free.
D)Canadian government securities are generally used to determine interest rates.
E)Canadian government securities have a larger supply and thus a lower price.

Question

Quizplus · Accepted Answer

Canadian government securities are widely regarded as risk-free because they are backed by the Canadian government's ability to tax its citizens and print more money if necessary. In contrast, corporate bonds carry a higher risk of default and therefore offer higher interest rates to compensate for this risk. Additionally, Canadian government securities are used as a benchmark for determining interest rates, which further enhances their perceived safety and lowers their interest rates.

Why Are the Interest Rates of Government of Canada Notes