Final answer:
US Treasury bonds are issued by the federal government and have lower risk, leading to lower interest rates compared to corporate bonds, which are issued by companies and carry a higher risk of default, justifying higher interest rates. Interest rates for both rise and fall together based on financial market conditions.
Step-by-step explanation:
The primary differences between US Treasury bonds and corporate bonds relate to the issuers and risk associated with each type of bond. US Treasury bonds, also known as notes, are debt securities issued by the federal government and are considered to be one of the safest investments as they are backed by the government's credit.
In contrast, corporate bonds are issued by companies and carry a higher risk of default, which is the failure to pay back interest or principal on a debt. As a compensation for this higher risk, corporate bonds typically offer a higher interest rate than Treasury bonds.
Both types of bonds have interest rates that tend to rise and fall together, aligned with the overall conditions for borrowers and lenders in financial markets.
However, the rates for corporate bonds are always higher to account for their increased risk compared to US government bonds.
This is why a corporate bond issued by a firm with an AAA rating by Moody's, indicating it as a relatively safe borrower, will still yield a higher interest rate than a Treasury bond. Nonetheless, both Treasury bonds and corporate bonds generally offer higher returns than bank accounts.