Posts Tagged ‘economy’
Corporate Bonds Vs Government Bonds
June 19th, 2009
Question: U.S Government bonds VS Corporate Bonds?
Why are the interest rates in these two markets so dramatically different at the present time as opposed to the “spreads” that prevailed two years ago?
Answer: Because of the danger of defaulting by corporations. The risk/ reward is much greater now.
The outlook for Corporate Bond and Gilt funds
Posted in Corporate Bond Investing | 
Tags: corporate bonds vs government bonds, economics, economy, finance, investing, sec | 
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Corporate Bonds Baa
April 25th, 2007
Question: The Risk Structure of Interest Rates?
I would really appreciate it. Thank you!!
The risk structure of interest rates studies the behavior of interest rates for bonds with the same term to maturity but different risk characteristics. Which of the following combinations of bonds provides the best situation to study the risk structure of interest rates?
A. A three-month Treasury bill vs. a 30-year Treasury bond
B. A 30-year Treasury bond vs. a corporate Aaa bond
C. A six-month Treasury bill vs. a corporate Aaa bond
D. Six-month commercial paper vs. a seven-year Treasury note
E. Three-month commercial paper vs. a corporate Baa bond
Answer: The best combination to observe the risk structure is option B: a 30 year Treasury bond and a corporate Aaa bond. The reason for this is simple. A 30 year Treasury bond and a corporate Aaa bond have similar terms so the term structure is constant, therefore, the primary difference is the risk structure. To further explain this answer I'll eliminate the other options.
Option A does not work because they are the same type of security--government securities--so they have the same risk (which, by the way, is virtually zero).
Option C does not work because those bonds of vastly different terms--6 months vs. about 30 years
Option D does not work because those bonds are also of vastly different terms--6 months vs. 7 years
Option E does not work because they are both vastly different terms and they are the same type of security--corporate debt
Therefore, Option B is the correct choice because it compares different types of securities (government vs. corporate) of similar terms (about 30 years).