Homework Answers
3]
The difference between the Treasury bond yield and the Corporate bond yield equals the default risk premium + liquidity premium.
There is a default risk premium for corporate bonds because Treasury bonds are risk-free whereas Corporate bonds have some default risk.
There is a liquidity premium for corporate bonds because Treasury bonds are highly liquid whereas Corporate bonds have less liquidity.
The answer is D
4]
A is true. Municipal bonds are safer than corporate bonds because they are less likely to default
B is not true. Municipal bonds are not issued by federal governments
C is not true. Municipal bonds carry lower coupon rates since they are less risky
D is not true. Municipal bonds are not frequently chosen by non-profits
E is not true. Municipal bonds do not have a default risk premium since they are almost default-free, i.e. the probability of default is extremely low
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