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Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for
Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period? Since such a bond provides a risk-free return over that period, the Law of One Price guarantees the risk-free interest rate be equal to this yield. Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. Since interest rates will rise and fall in response to the movement in bond prices. Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period. Since it the easiest bond to value and this gives investors an easy benchmark against which they can evaluate other investments. Why are the interest rates of Government of Canada notes less than the interest rates of equivalent corporate bonds? The Canadian government has a high credit spread. There is significant risk that the Canadian government will default. Canadian government securities are widely regarded to be risk-free. Canadian government securities are generally used to determine interest rates. Canadian government securities have a larger supply and thus a lower price
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