Question no 1

5. Interest rate spread Suppose that a 5year Treasury bond pays an annual rate of return of 1.9%I and a 5year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.5%. The risk premium on the Risky Investment bond is 7 percentage points. Consider a decrease in the annual rate of return on the Risky Investment bond from 7.5 percent to 5.1 percent. Such a change would V the interest rate spread on the Risky Investment bond oyer Treasuries to V . Which of the following explains the decrease in the annual rate of return on the Risky Investment bond? The expected default rate on the Risky Investment bond has decreased. "he expected default rate on the Treasury bond has decreased. "he expected default rate on the Treasury bond has increased. OOOO "he expected default rate on the Risky Investment bond has increased