How do risk and term structure affect interest
rate?
• One attribute of a bond that influences its interest rate is its risk of
default, which means that the issuer of the bond is unable to pay the
interest.
• US Treasury bond is usually considered as risk-free bond or defaultfree bond.
• The spread between the interest rates on bonds with default risk and
default-free bond, both of the same maturity, called the risk
premium.
• A bond with default risk will always have a positive risk premium,
which is positively related to risk.
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