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:

Sequential Game

A game theory concept where players make decisions one after another, with each player having knowledge of the previous players' decisions.

Nash Equilibrium

A situation in game theory where each player's chosen strategy maximizes their payoff, given the strategies chosen by other players.

Simultaneous Game

A game theory model where players make their moves at the same time without knowing the strategies chosen by other players.

Equivalent Payoffs

Financial or other returns that are the same in value, often considered in decision-making processes or in comparing investments.