Question
2. A bond tends to pay a high interest rate if it is a. a short-term bond rather than a long-term bond. b. a municipa I bond exempt from federal taxation. c. issued by the federal governme nt rather than a corporation. d. issued by a corporation of
Answer
4.2
(158 Votes)
Fiona
Master · Tutor for 5 years
Answer
d
Explanation
The question is asking about what likely influences the interest rates of a bond. In the financial market, the higher the risk of the investment, the higher the required or expected return, acting as compensation for taking on such risk. a) Typically, long-term bonds require a higher interest rate because the money is locked for a longer period of time, which is riskier than a short-term investment.b) Municipal bonds, which are usually exempt from federal taxation, attractively try to offer other benefits rather than rate, often bearing lower interest rates, to acknowledge tax saving of investors. c) Mostly, federal government bonds are assumed to have little to no risk because they have the power of taxation and therefore can always meet their debt obligations. Therefore, they carry lower interest rates compared to a corporate bond.d) If a bond is issued by a corporation with dubious credit quality, it carries a higher risk of default. In other words, there's a higher risk that the issuing corporation may be unable to pay its interest obligations as per the terms of the bond issuances. To entice investors to still buy this high-risk investment, the corporation must offer a higher interest rate.