The following yields on 20 year bonds prevailed in January for the three securities shown:
Aa-rated corporate bond 9.98%
Baa-rated corporate bond 10.34%
B-rated corporate bond 11.12%
The difference in yields is due primarily to
A)maturity risk premium
B)default risk premium
C)seniority risk premium
D)financial risk premium

Question

Quizplus · Accepted Answer

The difference in yields between the three securities is primarily due to the default risk premium. Aa-rated bonds have the lowest default risk, while B-rated bonds have a higher default risk. Investors require a higher yield to compensate for the additional risk of default. The maturity risk premium and seniority risk premium may play a role in yield differences between different bonds, but they are not the primary factors in this case. The financial risk premium is not a commonly used term in bond analysis.

The Following Yields on 20 Year Bonds Prevailed in January