Two Bonds Have the Same Term to Maturity

question 34

Multiple Choice

Two bonds have the same term to maturity. The first was issued by a state government and the probability of default is believed to be low. The other was issued by a corporation and the probability of default is believed to be high. Which of the following is correct?

• A)Because they have the same term to maturity the interest rates should be the same.
• B)Because of the differences in tax treatment and credit risk, the state bond should have the higher interest rate.
• C)Because of the differences in tax treatment and credit risk, the corporate bond should have the higher interest rate.
• D)It is not possible to say if one bond has a higher interest rate than the other.

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Definitions:

Disarming

The act of reducing hostility or suspicion, typically through charm, friendliness, or a straightforward approach.

Agreement

A mutual understanding or arrangement between two or more parties, often formalized by a contract.

Empathy

The ability to understand and share the feelings of another person from their perspective.

Groupthink

A psychological phenomenon occurring within a group of people, in which the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome.