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ACCA Applied Skills · Financial Management · Causes of exchange rate differences and interest rate fluctuations

Which of the following would most likely cause the interest rate on a corporate bond to be higher than that on a government bond of the same maturity?

A corporate bond yields more than a comparable government bond because investors require a premium for default risk and lower marketability. Government bonds are viewed as near risk-free, so the extra yield compensates for the additional risk.

  1. ALower default risk on the corporate bond
  2. BA risk premium for default and lower marketability of the corporate bondCorrect
  3. CA central bank base rate cut
  4. DA flatter yield curve

Explanation

Corporate bonds carry default risk and are usually less liquid than government bonds, so investors require a higher yield as a risk premium. Lower default risk would reduce the spread. A base rate cut affects both bonds and does not create the spread.

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