In: Finance
Compare and contrast a 5-year AAA corporate bond with a 5-year Treasury Note. Which would typically offer a higher interest rate? Why? What risk affects both types of bonds?
A year AAA corporate bond is different from a 5 year note in
following ways:
1. AAA bond is issued by corporates whereas treasury notes are
issued by government.
2. AAA bonds have higher rate of interest as compared to 5 year
treasury notes.
3. Liquidity of treasury bond is higher than a year AAA corporate
bond.?
4. Since the risk in AAA corporate bond is higher the returns can
be higher than a 5 year treasury note.
A 5 years AAA corporate bond has higher returns as
compared to a 5 Year treasury note. This is because they have
higher risk. Corporates are affected by systematic and unsystematic
risks . Hence their bonds also give higher returns. Treasury bills
have low returns because they are backed by the government and they
have taxation power. Hence they are default free.
Risks affecting corporate bonds are inflation, default risk,
liquidity risk, interest rate risk , maturity risk.
Risks affecting treasury bills are inflation, maturity risk and
interest rate risk.