Which of the following would both make the interest rate on a bond higher than otherwise?
A)the interest it pays is taxed and it is long term
B)the interest it pays is taxed and it is short term
C)the interest it pays is tax exempt and it is long term
D)the interest it pays is tax exempt and it is short term

Question

Quizplus · Accepted Answer

If the interest on a bond is taxed, the investor will receive less income after taxes, and therefore will demand a higher interest rate on the bond to compensate for this reduction in income. Furthermore, long-term bonds are generally associated with higher interest rates than short-term bonds because they expose investors to greater risks (such as inflation) over a longer period of time. Therefore, a bond that is both taxed and long-term will have a higher interest rate than a bond that is not taxed or is short-term.

Which of the Following Would Both Make the Interest Rate