Question

Which of the following interest rate components could explain the difference in market returns between the...

Which of the following interest rate components could explain the difference in market returns between the 3-year US Treasury and the 10-year US BB Corporate bonds? Select all that apply. Bond Type 3-Year 10-Year US Treasury 0.1662% 0.7022% US AA Corporate 0.4007% 1.4961% US BBB Corporate 0.9014% 2.1876% US BB Corporate 3.1120% 4.8348% Argentina Sovereign 151.8983% 83.7781% Venezuela Sovereign 178.8385% 89.8359% A. Maturity risk premium B. Liquidity premium C. Default risk premium

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Answer #1

The difference between a 10- year BB corporate bond and a Treasury bond is :

  • Maturity risk premium : the difference in the 10 year duration of US BB corporate bonds  and 3 year treasury bond.
  • Liquidity premium : there can be a lack of marketability and liquidity of these bonds.
  • Default risk premium : as the bonds is BB, AAA and AA rated bonds so there is a risk of default in these bonds in comparison to the treasuries.

So, the correct option is option A,B and C.

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