The higher the risk of a security, the higher its expected return will be. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.

Question:

The higher the risk of a security, the higher its expected return will be. A bond’s risk level is reflected in its yield, but understanding the different risks involved when investing in bonds is important.

The following graph shows the relationship between interest rates and maturity for three security classes: U.S Treasury securities (USTs), AA-rated corporate bonds, and BBB-rated corporate bonds. Use the dropdown menus to label each security’s profile correctly:

Is the default spread between the corporate bonds and the Treasury securities greater for shorter or longer maturities?

• Long-term maturities
• Short-term maturities