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Interest Rate of Treasuries Compared to Corporate Bonds

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How will the interest rate of Treasuries compare to that of corporate bonds if the government issues a guarantee against corporate bankruptcy?

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How will the interest rate of Treasuries compare to that of corporate bonds if the government issues a guarantee against corporate bankruptcy?

Generally, Treasuries are considered less risky or rather risk-free securities as they are backed up by Government and the corporate bonds are considered risky as they face default risk along with other business risks. But if the corporate bonds are backed by Government guarantee against bankruptcy, it would reduce or eliminate the default risk. This reduction in default risk will attract the investors to invest in corporate bonds as the returns would be higher when compared to investing in Treasuries. Result: The increased demand for corporate bonds and the decreased demand for Treasury securities may reduce the interest rates on corporate bonds and later increase the interest rates on ...

$2.19
See Also This Related BrainMass Solution

Compare and contrast the yields and maturities

Part One: Quantitative Exercises

Barbow Enterprises, Inc., is considering an expansion in their operations. One of the first items they want to examine is their cost of capital. According to the accounting department, the following items and their respective costs have been identified:

The cost of Common Equity: 15%
The before tax cost of debt: 12%
No Preferred stock
They have also calculated the marginal tax rate to be 40% and the stock sells at its book value.

Barbow Enterprises Inc.
Balance Sheet

Assets Liabilities and Owners' Equity

Cash $240 Long Term Debt $2,304

Accounts Receivable 480 Equity 3,456
Inventories 720
Net P&E 4,320

Total Assets $5,760 Total Liabilities and owners'
Equity $5,760

Calculate Barbow's after-tax weighted average cost of capital, using the data in the balance sheet above.

Part Two: Final Project 3: Government Securities

In this part of your Final Project, you will research and analyze current information (that is, within the past two months) on government securities.

Step 1: Go to a financial Web site to do your research. The following are three suggested sites, but you may use others. Be sure to cite your sources!

finance.yahoo.com
http://www.google.com/finance
moneycentral.msn.com
Step 2: Research current information (within the last two months) on the yields and maturity for:

U.S. treasuries
Municipal bonds
Corporate bonds
Required:

Discuss what the pure expectations theory would imply about the yield curve.
Compare and contrast the yields and maturities for each of the securities.
Discuss which you would hold and why relative to interest rate risk.

Criteria for above tasks:

1. Correctly calculated Barlow's after-tax weighted average cost of capital.
2. Researched the appropriate Web sites and obtained the necessary information on the securities indicated.
3. Compared and contrasted the yields and maturities for each of the securities.
4. Successfully used the expectations theory to predict future interest rate changes.
5. Compared the relationship between maturities and yields between U.S. treasures, municipal bonds, and corporate bonds.
6. Presented a structured report that is free of spelling and grammatical errors and cited sources in APA format when necessary.

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