Business, 03.03.2020 18:07 kony345p

Suppose that a 5-year Treasury bond pays an annual rate of return of 1.3%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.1%. The risk premium on the Risky Investment bond is percentage points.

Consider a decrease in the annual rate of return on the Risky Investment bond from 7.1 percent to 5.5 percent. Such a change would the interest rate spread on the Risky Investment bond over Treasuries to .

Which of the following explains the decrease in the annual rate of return on the Risky Investment bond?

1. The expected default rate on the Risky Investment bond has decreased.
2. The expected default rate on the Treasury bond has increased.
3. The expected default rate on the Treasury bond has decreased.
4. The expected default rate on the Risky Investment bond has increased.

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Suppose that a 5-year Treasury bond pays an annual rate of return of 1.3%, and a 5-year bond of the...

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