In general, if we compare two loans or bonds with the same loan size and taxability of interest-income, we would expect a higher interest rate on the loan or bond with a
A) higher risk and longer maturity.
B) lower risk and longer maturity.
C) lower risk and shorter maturity.
D) higher risk and shorter maturity.

Question

Quizplus · Accepted Answer

According to the risk-return tradeoff principle, investors demand higher returns for taking on higher risk. Therefore, if two loans or bonds have the same loan size and taxability of interest-income, the loan or bond with higher risk (such as credit risk, default risk, or interest rate risk) and longer maturity would require a higher interest rate to compensate investors for taking on such risks.

In General, If We Compare Two Loans or Bonds with the Same