Which One of the Following Bonds Would Be Likely to Exhibit

question 68

Multiple Choice

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

• A)a zero-coupon bond with 20 years until maturity
• B)a coupon-paying bond with 20 years until maturity
• C)a floating-rate bond with 20 years until maturity
• D)a zero-coupon bond with 30 years until maturity

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Definitions:

Externalities

Effects of a production or consumption activity on other parties not directly involved in the transaction, which may be either positive or negative.

Neutral Taxes

Taxes that do not affect the allocation of resources between different goods or activities in the economy.

Excess Burdens

The economic inefficiencies or losses that result from imposing taxes or government policies.

Principle of Second Best

An economic theory that suggests when a condition for a perfect market cannot be met, the next-best solution may involve violating another condition to improve efficiency.