Homework Answers
Answer: The correct option is C
Yield to maturity (YTM) of bond A is 8%, and bond B is 6%. The
interest rate risk is inversely proportional to YTM. So, lower YTM
means higher interest rate risk and vice versa. So, bond B will
have greater interest rate risk.
Option A is incorrect: When a company is unable to meet its
short term financial demands, it is referred to as liquidity risk,
if credit rating falls, the chance of liquidity risk increases. As
nothing has been mentioned about the rating, we cannot say which
bond will have liquidity risk.
Option B is incorrect: Nothing has been mentioned about the rating
of the bond.
Option D is incorrect: Bond A is not more valuable
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