What will happen to the interest on a bond as the bond's term increases?
A) The bond will pay less interest because it has less risk.
B) The bond will pay less interest because it has more risk.
C) The bond will pay more interest because it has more risk.
D) The bond will pay more interest because it has less risk.

Question

Quizplus · Accepted Answer

According to the risk-return tradeoff principle, the higher the risk, the higher the return investors will demand. Therefore, as the term of a bond increases, the risk of default also increases and investors will demand a higher return, which means the bond will pay more interest.

What Will Happen to the Interest on a Bond as the Bond's