Why do long-term bonds pay a higher rate of interest than short-term bonds? I. A longer maturity for a bond provides a greater opportunity for default by the borrower. II. Long-term bonds are only issued by corporations whereas short-term bonds are issued only by the U.S. government. III. Lenders require greater compensation for being without their money for a longer period of time.

Question

Quizplus · Accepted Answer

The first statement is partially correct, but default risk is not the primary reason for the higher interest rates on long-term bonds. The second statement is incorrect as both corporations and governments issue both short-term and long-term bonds. The third statement is correct as lenders require more compensation for the opportunity cost of not having access to their money for a longer period of time. Therefore, only statements I and III are correct, making choice D the best answer.

Why Do Long-Term Bonds Pay a Higher Rate of Interest