A newly issued 3-year Government of Canada bond has a face value of $1,000, pays a semi-annual coupon of 2.50%, and is trading at par. An existing 3-year corporate bond, issued by a highly rated Canadian corporation, offers a semi-annual coupon of 3.25% and is also trading at par. Which bond presents a lower credit risk?

Question: A newly issued 3-year Government of Canada bond has a face value of $1,000, pays a semi-annual coupon of 2.50%, and is trading at par. An existing 3-year corporate bond, issued by a highly rated Canadian corporation, offers a semi-annual coupon of 3.25% and is also trading at par. Which bond presents a lower credit risk?

Answer options:

• The corporate bond, due to its higher coupon rate. ✅ The Government of Canada bond, as sovereign debt typically has the lowest default risk.
• Both bonds have similar credit risk since they are trading at par.
• The corporate bond, because corporations are generally more transparent.

Correct answer: The Government of Canada bond, as sovereign debt typically has the lowest default risk.

Explanation: Government of Canada bonds are considered virtually risk-free because the Canadian government has the highest credit quality and ability to repay its debt. Even a highly-rated corporation carries more credit risk than the federal government.