Question

You would expect a bond of an Eastern European government to pay interest rate as compared to a bond of the U.S. government. You would expect a bond that repays the principal in year 2040 to pay interest rate as compared to a bond that repays the principal in year 2020. You would expect a bond from Coca-Cola to pay interest rate as compared to a bond from a software company you run in your garage. You would expect a bond issued by the federal government and a bond issued by New York State to pay different interest rate because of differences in the bonds'

Answer 1

Answer:

1) A bond of an Eastern European government

2) A bond that repays the principal in year 2040

3) A bond from a software company you run in your garage

4) A bond issued by the federal government

Explanation:

Term: Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds.

Credit risk: When bond buyers perceive that the probability of default is high, they demand a higher interest rate as compensation for this risk.

Tax treatment: When state and local governments issue bonds, the bond owners are not required to pay federal income tax on the interest income. Because of this tax advantage, bonds issued by state and local governments typically pay a lower interest rate than bonds issued by corporations or the federal government.