Share
Explore BrainMass

Interest Rate of Treasuries Compared to Corporate Bonds

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

Solution Preview

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