The amount of additional interest investors receive due to the various risk premiums changes over time. Sometimes the risk premiums are much larger than at other times. For example, the default risk premium was very small in the late 1990s when the economy was so healthy that business failures were rare. This risk premium increases during recessions.

Go to www.federalreserve.gov/releases/h15 (historical data) and find the interest rate listings for AAA and Baa-rated bonds at three points in time: the most recent; June 1, 2011; and June 1, 2008. Prepare a graph that shows these three time periods (see Figure 1 for an example). Are the risk premiums stable or do they change over time?

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Annual Yield (%) 16 14 12 10 8 6 4 2 Corporate Aaa Bonds Corporate Baa Bonds U.S. Government Long-Term Bonds FIGURE 1 Long-Term Bond Yields, 1919-2011 State and Local Government (Municipal) 0 J 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Interest rates on different categories of bonds differ from one another in any given year, and the spread (or difference) between the interest rates varies over time. Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1941-1970; Federal Reserve; www.federalreserve.gov/releases/h15/data.htm. Annual Yield (%) 16 14 12 10 8 6 4 2 Corporate Aaa Bonds Corporate Baa Bonds U.S. Government Long-Term Bonds FIGURE 1 Long-Term Bond Yields, 1919-2011 State and Local Government (Municipal) 0 J 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Interest rates on different categories of bonds differ from one another in any given year, and the spread (or difference) between the interest rates varies over time. Sources: Board of Governors of the Federal Reserve System, Banking and Monetary Statistics, 1941-1970; Federal Reserve; www.federalreserve.gov/releases/h15/data.htm.