Final answer:
The yield curve for an AA-rated corporate bond is expected to be above the US Treasury bond yield curve, reflecting higher default risks and offering higher interest as compensation.
Step-by-step explanation:
The yield curve for an AA-rated corporate bond is typically above the yield curve for US Treasury bonds. This difference in interest rates reflects the higher risk of default that corporate bonds carry compared to government securities. Although both types of bonds see their interest rates rise and fall together, influenced by conditions in the financial markets, corporate bonds offer a higher interest rate as compensation for their increased risk level, as stated by Moody's ratings and as can be seen in Figure 17.5. This higher yield is necessary to attract investors who might otherwise prefer the lower risk associated with Treasury bonds.