Question

Which should have the higher risk premium on its interest rates, a corporate bond with a Moody’s Baa rating or a corporate bond with a C rating? Why?

Short answer

A bond is a financial instrument that a company releases to raise funds and then pays interest to the investors. The bond's interest rate can be fixed or variable.

Step-by-step solution

To determine

The larger the risk premium on a corporate bond's interest rate, the higher the rating.

Explanation

In comparison to a corporate bond with a Baa rating, a corporate bond with a rating will have a higher risk premium on its interest. When compared to corporate bonds with a Baa rating, the C grade bond has a higher default risk, which reduces demand and raises interest rates.