Question

The U.S. government issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which do you think has the higher rate of return, longer-term U.S. government bonds or short-term U.S. government bonds? Explain.

Short answer

The 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations because the bonds issued by the government are less risky.

The longer-term U.S. government bonds have a higher rate of return than the short-term U.S. government bonds.

Step-by-step solution

Step 1. Lower returns on government bonds compared to corporations

The higher the risk associated with the asset, the higher are the returns. The bonds issued by the U.S government are considered less risky than the bonds issued by the corporations. So, U.S. government bonds have lower rates of return.

Step 2. Higher returns on long term government bonds 

The longer-term U.S government bonds have a higher return than the short run because the investors need high returns as compensation for waiting for the longer term.