Assume the Bonds Below Have the Same Term and Principal

question 28

Multiple Choice

Assume the bonds below have the same term and principal and that the state or local government that issues the municipal bond has a good credit rating.Which list has bonds correctly ordered from the one that pays the highest interest rate to the one that pays the lowest interest rate?

• A)corporate bond,municipal bond,U.S.government bond
• B)corporate bond,U.S.government bond,municipal bond
• C)municipal bond,U.S.government bond,corporate bond
• D)U.S.government bond,municipal bond,corporate bond

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Definitions:

Crowding Out

A decrease in investment that results from government borrowing.

Accelerator Effects

The phenomenon where an increase in national income leads to a proportionally larger increase in investment spending, magnifying the initial rise in income.

Automatic Stabilizer

Economic policies and programs, such as unemployment insurance and taxation, that automatically adjust to counteract economic fluctuations without the need for government intervention.

Money Market

A section of the financial market where short-term financial assets with high liquidity are traded.