Which of the following both make the interest rate on a bond higher than otherwise?
A)the interest it pays is taxed and it was issued by a financially strong corporation
B)the interest it pays is taxed and it was issued by a financially weak corporation
C)the interest it pays is tax exempt and it was issued by a financially strong corporation
D)the interest it pays is tax exempt and it was issued by a financially weak corporation

Question

Quizplus · Accepted Answer

When the interest on a bond is taxed, the effective yield for investors becomes lower, which means the interest rate on the bond must be higher to attract investors. Additionally, when a bond is issued by a financially weak corporation, investors perceive a higher risk of default, which means the interest rate on the bond must also be higher to compensate for the risk. Therefore, both of these factors would make the interest rate on a bond higher than otherwise.

Which of the Following Both Make the Interest Rate on a Bond