1. Why is the YTM of bonds with credit risk higher than those of default-free bonds?...

1. Why is the YTM of bonds with credit risk higher than those of default-free bonds?

2. Would you choose corporate bonds over Treasury bonds? why.

Solutions

Expert Solution

1. Yield to maturity of bonds with credit risk would be higher because there would always be a compensation for excess risk on investment because those bonds who are having a higher credit risk would be more prone to doing default and investors would be less willing to invest into those bonds so there would be a higher risk premium allocated to those bonds and there would be a higher yield to maturity in order to compensate for those risks than default free bonds because default free bonds are not prone to default risk as they would be having lower yield to maturity as they will not be defaulting.

2.I am an aggressive investor and I would always be Preferring risk o ver risk-free so I would be liking to invest into corporate bonds because those bonds are having a default as well as a Credit risk whereas risk free bonds are having low risk and there is a possibility of very low return so corporate bonds have the possibility of building a higher rate of return and since I am an aggressive investor I would be Preferring corporate bonds over treasury bonds

jeff jeffy answered 1 year ago

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