Ian has the choice of two bonds,one that pays 4 percent interest and one that pays 86 percent interest.Which of the following situations is most likely?
A) The 8 percent bond is less risky than the 4 percent bond.
B) The 8 percent bond is a Canadian government bond,and the 4 percent bond is a junk bond.
C) The 8 percent bond has a longer term than the 4 percent bond.
D) The 8 percent bond is a Canadian government bond,and the 4 percent bond is a provincial bond.

Question

Quizplus · Accepted Answer

Higher interest rates usually come with higher risk, so it is unlikely that the 8 percent bond is less risky than the 4 percent bond. Likewise, the country or type of bond does not necessarily indicate risk or interest rate. However, a longer-term bond typically offers a higher interest rate to compensate investors for the added risk of holding the bond for a longer period of time. Therefore, it is most likely that the 8 percent bond has a longer term than the 4 percent bond.

Ian Has the Choice of Two Bonds,one That Pays 4