Question

You would expect a bond of an Eastern European government to pay   interest rate as compared to a bond of the U.S. government.

You would expect a bond that repays the principal in year 2040 to pay   interest rate as compared to a bond that repays the principal in year 2020.

You would expect a bond from a software company you run in your garage and a bond from Coca-Cola to pay different interest rates because of differences in the bonds'   .

You would expect a bond issued by New York State to pay   interest rate as compared to a bond issued by the federal government.

Answer 1

Answer: • Expect a bond of an astem European government pay interest rate as compared to a bond of us government: > are would expect a bond of us government and a bond] of an Eastern European government to pay interest rates. because of differences in the bonds credit risk. government would pay a higher As bonds of an european of the vis government bond because interest rate than the bond greater risk of default. there would be a Expect a bond that repays the principal in year 2000 to pay interest rate of compared to a bond that repays the Principal in year 2020: we would expect a bond that repays the principal interest rate as compared in year 2010 to pay the higher

to a bond that repays the principal in year 2020. • Expect a bond from a software company you run in your garage and a bond from coca-cola to pay different interest rates because of difference in the bonds: - we would expect a bond from a software company we run in our garage and a bond from coca-cola to pay different interest rates because of differences in the bonds credit risk As bond from a software company fun in the garage would pay a higher interest rate than a bond from coca-cola because software company has more credit risk. . Expect a bond issued by New york State to pay interest rate of compared to a bond issued by the federal government :

we would expect a bond issued by the federal government to pay the higher interest rate as compared to a bond issued by the new york State because an investor does not have to pay federal income tax on the bind from new york state -

Answer 2

There are many different bonds in the world economy, and these bonds differ according to three characteristics:

Term to maturity:	Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds.
Credit risk:	When bond buyers perceive that the probability of default is high, they demand a higher interest rate as compensation for this risk.
Tax treatment:	When state and local governments issue bonds, the bond owners are not required to pay federal income tax on the interest income. Because of this tax advantage, bonds issued by state and local governments typically pay a lower interest rate than bonds issued by corporations or the federal government.

Given these characteristics, the bond of an Eastern European government would pay a higher interest rate than the bond of the U.S. government because there would be a greater risk of default. A bond that repays the principal in 2040 would pay a higher interest rate than a bond that repays the principal in 2020 because it has a longer term to maturity. A bond of a software company you run in your garage would pay a higher interest rate than a bond issued by Coca-Cola because your software company has greater credit risk. And a bond issued by the federal government would pay a higher interest rate than a bond issued by New York State because an investor does not have to pay federal income tax on the bond from New York State. See Section: Financial Markets.