Question: 1. Suppose Bond A has higher default risk than Bond B. Which bond should have the higher interest rate? Why? 2. Currently a number of

1. Suppose Bond A has higher default risk than Bond B. Which bond should have the higher interest rate? Why?

2. Currently a number of industries are facing higher risk of default on bonds due to underperformance from COVID-19. Suppose the government announces next day that it will guarantee all corporate bonds and pay the creditors if the companies fail to do so in the future. Explain the mechanism how the government guarantee will affect the default risks, demands, prices, and interest rates of corporate bonds?

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