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Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows

T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%

What is the primary explanation in the differences in rates among these issues?

1 Answer

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Answer:

The differences in the rates among these bonds is the difference in their credit risks. The T-Bond is a bond backed by the government which means it has no chances of defaulting therefore it has the lowest interest rate, as investors are willing to receive less interest for a T - Bond because it is least likely to default. On the other hand the other 3 bonds are rated and the best rated is AAA followed by A and the last BBB, the higher the rating the less likely the bond is to default, so the AAA bond has to pay less interest than A because it is less likely to default.

Step-by-step explanation:

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