Explaining the rate spread on corporate bonds

The purpose of this article is to explain the spread between rates on corpo rate and government bonds. We show that expected default accounts for a sur prisingly small fraction of the premium in corporate rates over treasuries. While state taxes explain a substantial portion of the difference, the rem aining portion of the spread is closely related to the factors that we comm only accept as explaining risk premiums for common stocks. Bath our time se ries and cross-sectional tests support the existence of a risk premium on c orporate bonds.