Final answer:
The price of a 10-year corporate bond with a yield of 3.00% above the risk-free rate is likely to be less than the price of a bond with a yield of 1.00% above the risk-free rate, due to the inverse relationship between yield and price, and the need for higher-yielding bonds to compensate for additional risk.
Step-by-step explanation:
Relative to corporate bonds, it is generally more likely that the current price of a 10-year corporate bond yielding 3.00% more than its risk-free rate of 1.20% will be less than the current price of a 10-year corporate bond yielding 1.00% more than its risk-free rate of 1.20%. The reason for this is that the yield of a bond is inversely related to its price. Bonds with higher yields (assuming the same maturity and credit quality) typically have lower prices because they need to offer a higher return to compensate investors for taking on more risk, such as the higher possibility of default. Additionally, given that corporate bonds have higher yields than Treasury bonds to compensate for higher risk, they would experience a price drop to achieve the higher yield mentioned.
Furthermore, corporate bonds issued by AAA-rated firms, as identified by Moody's, typically pay a higher interest rate than Treasury bonds due to the increased risk of default. The corporate bonds and U.S. Treasury bonds' interest rates (officially called 'notes') rise and fall together based on financial market conditions, but corporate bonds will always offer a premium over the risk-free Treasury bond rate to attract investors. This premium is reflected in the yield spread between the corporate bond and the Treasury bond.