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.

---

Definitions:

Regressive

Refers to a tax system in which the tax rate decreases as the taxable amount increases, often placing a heavier burden on low-income earners.

Progressive

A political and social philosophy advocating for reforms that aim to reduce inequality, improve social justice, and enhance welfare.

Marginal Tax Rate

The rate of tax applied to the last dollar of income, showing the percentage of tax paid on any additional dollar earned.

Clinton Administration

The executive period from 1993 to 2001 in the United States, under the presidency of Bill Clinton, characterized by economic prosperity and political challenges.