Because of their additional default and liquidity risk, corporate bonds yield (-

Question

Because of their additional default and liquidity risk, corporate bonds yield (-Select-1.less than 2. equal to3. more than?Treasury bonds with the same maturity. In addition, the yield spread between corporate and Treasury bonds is ?-Select-1.smaller2.larger3.zero?the longer the maturity. This occurs because longer-term corporate bonds have ?-Select-1.less2.more3.similar?default and liquidity risk than shorter-term bonds, and both of these premiums are ?-Select-1.absent2.present?in Treasury bonds.

Explanation / Answer

Because of their additional default and liquidity risk, corporate bonds yield more than Treasury bonds with the same maturity. In addition, the yield spread between corporate and Treasury bonds is larger the longer the maturity. This occurs because longer-term corporate bonds have more default and liquidity risk than shorter-term bonds, and both of these premiums are absent in Treasury bonds.

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