Why Do Long-Term Bonds Pay a Higher Rate of Interest

question 15

Multiple Choice

Why do long-term bonds pay a higher rate of interest than short-term bonds? I. A longer maturity for a bond provides a greater opportunity for default by the borrower. II. Long-term bonds are only issued by corporations whereas short-term bonds are issued only by the U.S. government. III. Lenders require greater compensation for being without their money for a longer period of time.

• A) I only
• B) II only
• C) I and II only
• D) I and III only

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Definitions:

Debtor Corporation

A business entity that owes money to creditors.

Creditors

Individuals or entities that are owed money by others, usually as a result of extending loans, credit, or services.

Bankruptcy Law

A legal framework governing the process through which individuals or entities unable to meet their financial obligations can seek relief from some or all of their debts.

Equitable Treatment

Fair and impartial handling in a manner that is right or reasonable, giving individuals or groups equal opportunities and fairness.