The risk structure of interest rate (the relationship among interest rates on bonds with the same maturity) is explained by three factors: default risk, liquidity, and the income tax treatment of the bond's interest payments.
             One attribute of a bond that influences its interest rate is its default risk, that chance that the issuer of the bond will default, that is, be unable to make interest payments or pay off the face value when the bond matures. U.S. Treasury bonds have usually been considered to have no default risk because the federal government can always increase taxes or even print money to pay off its obligations. Bonds like these with no default risk are called default-free bonds. The spread between the interest rates on bonds with default risk and default-free risk bonds, called the risk premium, indicates how much additional interest people must earn in order to be willing to hold a risky bond. A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise the risk premium.
             If the possibility of default increases because a corporation begins to suffer large losses, the default risk on corporate bonds will increase, and the expected return on these bonds will decrease. In addition, the corporate bond's return will be more uncertain as well. At the same time, the expected return on default-free Treasury bonds increases relative to the expected return on corporate bonds while their relative riskiness declines. The Treasury bonds thus become more desirable, and demand rises.
             Corporate bonds always have higher interest rates than U.S. Treasury bonds because they always have some risk of default, whereas U.S. Treasury bonds do not.
             Another attribute of a bond that influences its interest rate is its liquidity. The more liquid an asset is, the more desirable it is (holding everything else constant). U.S. Treasury bonds are the most liquid of all long-term...