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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