The term structure of interest rates is upward sloping for all bond types. A certain AAA rated non-callable 10-year corporate bond has been issued at a 6.15 percent promised yield. Which one of the following bonds probably has a higher promised yield?
A)A similar quality municipal bond.
B)A non-callable AAA rated corporate bond with a five-year maturity.
C)A callable AAA rated corporate bond with a 15-year maturity.
D)A non-callable AAA rated convertible corporate bond with a 10-year maturity.
E)All of the options would have a higher promised yield.

Question

Quizplus · Accepted Answer

A callable bond is generally riskier than a non-callable bond, leading to a higher promised yield. Additionally, the longer maturity of 15 years also adds to the risk and would result in a higher promised yield. A similar quality municipal bond may have a lower promised yield since they are often perceived as less risky than corporate bonds. A non-callable AAA rated corporate bond with a shorter 5-year maturity may also have a lower promised yield since it has less duration risk compared to the non-callable 10-year corporate bond. A convertible bond may have additional features that affect its promised yield, but the information provided in the question is not sufficient to make a comparison.

The Term Structure of Interest Rates Is Upward Sloping for All