Question

1. A one-year discount bond issued by X has a payout of $1,250 and today's price is $1,189. A one-year discount bond issued by Y has a payout of $382 and today's price is $354. Then the bond issued by X has a ____ yield than the bond issued by Y, and this could be because X has a ____ default risk.

Group of answer choices

higher; lower

lower; lower

lower; higher

higher; higher

2. Suppose that the tax advantage of municipal bonds over US Treasury bonds increases. In this case, we would expect that the demand curve for municipal bonds will _____ and as a result, the equilibrium price will ____.

Group of answer choices

decrease; rise

decrease; fall

increase; rise

increase; fall

Answer 1

Answer 1: Option D is correct. As one year discount bond issued by X has higher yield as compared to bond issued by Y and this could be because X has a higher default risk as investment amount of X is greater than Y. As it means that risk rate is higher in bond X so the yield is also higher.

Answer 2: Option C is correct. As municipal bond has higher tax advantage than it resulted in the demand curve increase as well as equilibrium price has been rises. As municipal bond price has been increased as prices will be increased.