The risk and term structure of interest rates

6 important questions on The risk and term structure of interest rates

What is a treasury bond?

are considered default free (because the government can raise taxes or print money to pay off obligations)

What is a risk premium?

is the spread (difference) between the interest rates on bonds with (some) default risk and the interest rates on (default free) treasury bonds with the same maturity. And indicates how much additional interest people must earn to be willing to hold that risky bond.

What are junk bonds?

Bonds with rating below Baa/BBB
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Why are treasury bonds the most liquid bonds?

because many bonds are traded, easiest to sell, and is sold at low costs.

What is defined as the income tax considerations?

the difference between federal and municipal bond rates

What happens when the municipal bonds are given a tax-free status?

demand for bond increases, its price goes up, and interest rate goes down (despite being less liquid and higher risk of default)

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