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Problem:

The rate of return for an Australian Commonwealth Government Treasury Bond is given as 4% per annum. The yearly return for the Australian share market is given as 12%. Suppose a listed company has a beta value of 0.5.

(a) The Government of South Australia issues State Government Treasury Bonds using its financing authority, the South Australian Government Financing Authority (SAFA). Explain why these bonds are not considered to be risk-free.

(b) Explain what are bond ratings, and how they affect investor returns.

Additional Information:

This question basically belongs to the Finance and it discusses about SAFA bonds and why the bonds are considered risk-free and describes what are bond ratings as well as junk bonds.

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