Compare and contrast a 5-year AAA corporate bond with a 5-year Treasury Note. Which would typically...

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?

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Expert Solution

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.

jeff jeffy answered 2 months ago

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