Business College

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that
a. Bond A was issued by a financially weak corporation and Bond B was issued by a financially strong corporation.
b. Bond A was issued by the Exxon Mobil Corporation
and Bond B was issued by the state of New York.
c. Bond A has a term of 20 years and Bond B has a term of 1 year.
d. All of the above are correct.

Answers

Answer 1

All of the above options are correct regarding the two bonds having identical characteristics, the interest rate on bond A is expected to be higher than the interest rate on bond B.

What is the relationship between interest rates and bonds?

Bond prices are inversely related to interest rates. This means that when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.

Which bond do you think will pay the highest interest rate?

Long-term bonds are riskier than short-term bonds. Long-term bond holders have to wait longer for the principal to be repaid. To offset this risk, long-term bonds typically pay higher interest rates than short-term bonds.

What happens to bonds when interest rates rise?

Rate hikes can cause bond prices to fall. Income from municipal bonds is generally exempt from federal taxes, but may be subject to an alternative federal minimum tax (AMT) and state and local taxes.

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