ACCA FM · Chapter 2 · Question 10 of 10
Which of the following is the main reason why the interest rate on an unsecured loan to a small company is usually higher than the yield on a treasury bill of the same maturity?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Investors require a higher return to compensate for the higher default risk
Explanation
The return required by investors increases with risk. Treasury bills are backed by the government and are close to risk free, whereas an unsecured loan to a small company carries significant default risk and is less liquid, so lenders demand a higher interest rate. Both investments face the same inflation, and the question states that maturities are the same.
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