Question

Would you expect that the interest rate on a corporate bond would be higher or lower than the rate on a municipal bond of comparable quality and term? Why?

Answer 1

Answer:

Higher

Explanation:

Bonds refer to debt instruments wherein the issuer raises long term finance, agreeing to pay the lenders i.e bondholders a fixed rate of coupon payments apart from principal repayment at the end of the term.

Bonds issued by corporates are termed as corporate bonds whereas bonds issued by municipal or state authorities are termed as municipal bonds.

Municipal bonds are a safer option for investors as the repayment is assured by the state government which is not the case with corporate bonds which are riskier comparatively since corporates might default upon repayment.

To compensate for higher risk involved, corporates have to issue their bonds at higher interest rates than municipal bonds else such bonds would be unattractive.