For each the following pairs, indicate which bond you would expect to pay a high
ID: 1201609 • Letter: F
Question
For each the following pairs, indicate which bond you would expect to pay a higher interest rate. A bond of an Eastern European government A bond of the U.S. government A bond that repays the principal in year 2020 A bond that repays the principal in year 2040 A bond from Coca-Cola A bond from a software company you run in your garage A bond issued by New York State A bond issued by the federal government For each of the following pairs, indicate which bond you would expect to pay a higher interest rate.Explanation / Answer
1. A Eastern European govt,. because non- US govt bonds will also include risk premium (cost of incurring risk) besides interest rates.
2. A bond that repay the principal in year 2040.Because higher maturity requires higher interest rate.
Note that the holding period need to be compensated.
3. A software company you run in your garage because your company is not well-known unlike coca cola & therefore you need to pay higher interest rate to compensate.
4. A bond issued by federal govt. Because federal bonds are not tax-exempted compared to municipal bonds
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