Interest rate differentials at a certain point in time may be expressed by comparing the interest rates on:
A)a Treasury bill and a Treasury bond
B)a Treasury bill and a long-term corporate bond
C)a Treasury bill and the commercial paper rate
D)a risky security and a comparable maturity U.S.Treasury security
E)none of the above

Question

Quizplus · Accepted Answer

Interest rate differentials typically involve comparing the interest rate on a risky security (such as a corporate bond or a mortgage-backed security) with the interest rate on a comparable maturity U.S. Treasury security. This comparison helps investors determine the additional yield they are receiving for taking on the additional risk associated with the non-Treasury security. Options A and B involve comparing Treasury securities with other types of fixed income securities, but they do not necessarily reflect differences in credit risk. Option C involves comparing a Treasury bill with the commercial paper rate, which also reflects credit risk, but may not be directly comparable to a Treasury bill. Therefore, option D is the best choice.

Interest Rate Differentials at a Certain Point in Time May