This paper explains the spread between corporate and government bond rates by identifying three key components: (1) compensation for expected default, (2) compensation for state taxes, and (3) compensation for additional systematic risk in corporate bonds. The authors argue that corporate bonds should be compared using spot rates (yield to maturity on zero-coupon bonds) rather than yield to maturity on coupon bonds. They find that corporate spot spreads vary across rating classes and are influenced by expected default loss, tax premiums, and systematic risk. The tax effect is emphasized as it has been overlooked in previous studies. The paper provides empirical estimates of these components and shows that the risk premium is a significant part of the spread. The authors also find that the spread is influenced by systematic factors, such as those affecting stock markets, and that the risk premium is a major contributor to the spread. The paper concludes that the spread is not solely due to expected default or taxes but also includes a risk premium. The authors use data from the Lehman Brothers Fixed Income database to estimate spot rates and analyze corporate spreads. They find that the spread increases with maturity and that the spread for lower-rated bonds is higher. The paper also shows that the spread is influenced by the risk premium, which is a significant factor in corporate bond pricing. The authors argue that the risk premium is a major component of the spread and that it is not fully explained by expected default or taxes. The paper provides evidence that the risk premium is a significant factor in corporate bond spreads and that it is influenced by systematic factors. The authors conclude that the spread is not solely due to expected default or taxes but also includes a risk premium.This paper explains the spread between corporate and government bond rates by identifying three key components: (1) compensation for expected default, (2) compensation for state taxes, and (3) compensation for additional systematic risk in corporate bonds. The authors argue that corporate bonds should be compared using spot rates (yield to maturity on zero-coupon bonds) rather than yield to maturity on coupon bonds. They find that corporate spot spreads vary across rating classes and are influenced by expected default loss, tax premiums, and systematic risk. The tax effect is emphasized as it has been overlooked in previous studies. The paper provides empirical estimates of these components and shows that the risk premium is a significant part of the spread. The authors also find that the spread is influenced by systematic factors, such as those affecting stock markets, and that the risk premium is a major contributor to the spread. The paper concludes that the spread is not solely due to expected default or taxes but also includes a risk premium. The authors use data from the Lehman Brothers Fixed Income database to estimate spot rates and analyze corporate spreads. They find that the spread increases with maturity and that the spread for lower-rated bonds is higher. The paper also shows that the spread is influenced by the risk premium, which is a significant factor in corporate bond pricing. The authors argue that the risk premium is a major component of the spread and that it is not fully explained by expected default or taxes. The paper provides evidence that the risk premium is a significant factor in corporate bond spreads and that it is influenced by systematic factors. The authors conclude that the spread is not solely due to expected default or taxes but also includes a risk premium.