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 these choices are correct.

Question

Quizplus · Accepted Answer

Since the term structure of interest rates is upward sloping, longer-term bonds are expected to have higher promised yields. Therefore, a callable AAA-rated corporate bond with a 15-year maturity is likely to have a higher promised yield than a non-callable 10-year bond. Choice A and B have shorter maturities and hence lower promised yields. Choice D, a convertible bond, may have a lower promised yield due to its added flexibility for the investor.

The Term Structure of Interest Rates Is Upward Sloping for All