Question

The yield curve for corporate bonds tends to have a shape similar to that for Treasury securities, but interest rates on corporate bonds are at lower levels because corporate yields include smaller default risk and liquidity premiums than do Treasury yields.

A. True
B. False

Answer 1

The claim that corporate bonds have lower interest rates than Treasury securities is false. Corporate bonds typically offer higher interest rates to compensate for their increased default risk and lower liquidity compared to U.S. government bonds.

Step-by-step explanation:

The statement that the yield curve for corporate bonds tends to have a shape similar to that for Treasury securities, but interest rates on corporate bonds are at lower levels, is false. In reality, corporate bonds usually offer a higher interest rate than Treasury bonds. This is because there is a higher risk of default associated with corporate entities as compared to the virtually default-free U.S. government bonds. Corporate bond investors require additional compensation for taking on this increased risk, which is known as the default risk premium.

Moreover, corporate bonds also include a liquidity premium because they are often less liquid than U.S. Treasury bonds. This means they can be more difficult to buy or sell quickly without affecting the bond's price. Overall, while the interest rates for both corporate bonds and Treasury bonds tend to move in tandem based on financial market conditions, it is the corporate bonds that attract a higher interest rate due to these additional risks.