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:

Common Law

A body of unwritten laws based on legal precedents established by the courts, contrasting with statutory law.

Doctrine of Substantial Performance

A legal principle that allows a contracting party to enforce the contract even if there are minor breaches, provided substantial performance of the contract has been achieved.

Perfect Tender Rule

A principle in the Uniform Commercial Code allowing a buyer to demand a full compliance with the contract terms for goods.

Uniform Commercial Code

A comprehensive set of laws governing commercial transactions in the United States, designed to standardize and simplify the laws across the states.