Figure 14.1: BAA and 10-Year Bonds, 2006-2010
-In Figure 14.1 above, the 10-year bond yield is considered ________, while the BAA bond yield represents ________.
A) the federal funds rate; the financial friction
B) the saving rate; the lending rate
C) the financial friction; the prime lending rate
D) a risk-free interest rate; a relatively risky interest rate
E) inflation; the M1 money growth rate

Question

Figure 14.1: BAA and 10-Year Bonds, 2006-2010  
-In Figure 14.1 above, the 10-year bond yield is considered ________, while the BAA bond yield represents ________.
A) the federal funds rate; the financial friction 
B) the saving rate; the lending rate 
C) the financial friction; the prime lending rate 
D) a risk-free interest rate; a relatively risky interest rate 
E) inflation; the M1 money growth rate

Quizplus · Accepted Answer

The 10-year bond yield is considered a risk-free interest rate as it represents the interest rate that the government pays on its debt. On the other hand, the BAA bond yield represents a relatively risky interest rate as it is issued by companies that are considered to be investment grade but with some credit risk. Therefore, D is the best choice as it accurately describes the characteristics of these two bond yields.

Figure 141: BAA and 10-Year Bonds, 2006-2010