If You Lend Money to the Government by Buying a One-Year

Multiple Choice

If you lend money to the government by buying a one-year Treasury bill, your interest rate is 4%, but if you lend money to XYZ corporation by buying a one-year XYZ bond, you can earn 7%. What is the main reason for this difference in interest rates?

A) higher tax rate on the XYZ bond
B) higher inflation on the XYZ bond
C) higher default risk on the XYZ bond
D) higher expected real after-tax rate of return on the XYZ bond