Final answer:
The risk premium is likely to be highest for corporate bonds, especially those issued by riskier firms, which are coined as high yield or junk bonds, due to the elevated risk compared with the government's low-risk bonds.
Step-by-step explanation:
The risk premium is likely to be highest for corporate bonds, as these are issued by firms that have a higher chance of default compared to the government. Government bonds, such as Treasury bonds, are low-risk because the government is considered an extremely safe borrower and therefore pays a relatively low rate of interest. On the other hand, firms, especially those considered riskier, must offer higher interest rates to compensate investors for the higher risk of default. These higher interest rate bonds issued by riskier firms are often referred to as high yield bonds or junk bonds.
Blue-chip stocks
While blue-chip stocks represent equity in large, financially stable companies and also carry risk, their risk profile is different from that of bonds and does not involve a fixed interest payment. Treasury bills, being short-term government debt, also carry very low risk and accordingly offer low interest rates. Therefore, among the options provided, corporate bonds, especially those from riskier firms, carry the highest risk premium.