Consider two otherwise-comparable bonds. One is a corporate bond of the lowest investment grade, and the...

Consider two otherwise-comparable bonds. One is a corporate bond of the lowest investment grade, and the other is issued by the American government. The difference between their interest rates represents

Group of answer choices

the liquidity premium

the prime rate markup

the default risk premium

the term spread

Solutions

Expert Solution

Lowest investment grade bond assumed to have higher probability of default therefore to compensate investor for this default risk issuer of this bonds should pay above the risk free rate that is rate offered by government bonds

Therfore the difference in prices of both these bonds is due to default risk premium.

Option C is correct

Rahul Sunny answered 1 year ago

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