Case Study
Should I buy a 10-year Treasury at 4% or a corporate at 6%?
The 'extra 2% yield' isn't free. It's the price of credit risk. A BBB-rated 10y corporate at 6% trades at a 200 bp spread to the 4% Treasury. Historical default rates on BBB over 10 years are ~3.5% cumulative; assume 40% recovery, so expected loss ≈ 2.1%. The 'real' risk-adjusted yield on the corporate is closer to 4%, basically matching the Treasury. Plus the corporate carries 8.1 years of modified duration vs the Treasury's 8.5y. A 100bp rate move costs you 8% either way. Run the numbers in Bond Pricing → toggle YTM and compare prices side by side. Lesson: spread compensates for default risk, not for free yield.