Question

Assume that interest rates on 20-year Treasury and 20-year corporate bonds are as follows T-bond = 3.72% AAA = 4.12% A = 4.64% BB = 5.18% The differences in these rates were probably caused primarily by:

Answer 1

Answer: Default risk differences.

Explanation:

The Default risk is the inherent risk a lender faces that a borrower will not pay them back the debt they want to borrow. The lender will therefore charger a high return to cater for this risk. The higher the risk, the higher the return charged.

T-bonds have no default risk because they are guaranteed by the US Government which is why it's rate is the lowest. For the other bonds, there is something called a Credit rating. Bonds are usually rated on how risky it will be to lend to the company borrowing with AAA being of the lowest risk. Therefore as one goes up from AAA, the bonds will have higher default risks.