1. The amount of additional interest investors receive due to the various premiums changes over time.

Sometimes the risk premiums are much larger than at other times. For example, the default risk premium was very small in the late 1990s when the economy was so healthy business failures were rare. This risk premium increases during recessions.

Go to www.federalreserve.gov/releases/releases/h15

(historical data) and find the interest rate listings for AAA and Baa rated bonds at three points in time, the most recent, June 1, 1995, and June 1, 1992. Prepare a graph that shows these three time periods (see Figure 1 for an example). Are the risk premiums stable or do they change over time?