Question

Identify the following securities with the highest yield and lowest yield (at issuance) and briefly explain why:

a. 10-year treasury bonds

b. 10-year corporate bonds with AAA rating

c. 10-year corporate bonds with BB rating

d. 2-month treasury notes

Answer 1

2 principles dictate the returns - 1) risk and 2) maturity period

Risk:

Treasury debt (since its a government issued security) < corporate debt AAA < corporate debt BB

So corporate bond BB rating has highest yield option c

Maturity:

Lower the maturity less y the asset (everything else equal).

Therefore 2 month treasury notes is less risky than 10 year treasury bond.

So treasury notes has lowest yield option d