Final yield on a corporate bond is equal to which of the following?

• A. Government yield plus spread
• B. Coupon rate plus tax
• C. Government yield minus spread
• D. Corporate yield times 1

Answer: (C)

The key idea is that corporate bonds carry more risk than government bonds, so investors demand a premium over the risk-free rate. The yield you expect from a corporate bond (its final yield) is the government yield, which reflects the risk-free rate, plus a credit spread that accounts for the additional default and liquidity risk of the corporate issuer. In other words, final yield = government yield + spread.

Taxes affect net cash flows but don’t set the yield in this basic comparison, so coupon rate plus tax isn’t the direct yield calculation. Subtracting the spread would imply corporate yields are lower than government yields, which isn’t consistent with compensating for extra risk. Simply multiplying the corporate yield by 1 doesn’t connect to the government baseline at all.