Consider the following four debt securities, which are identical in every characteristic except as noted:
W: $\quad $A corporate bond rated AAA
X:$\quad $ A corporate bond rated BBB
Y:$\quad $ A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: $\quad $?A corporate bond rated AAA with the same time to maturity as bond Y that trades in a
More liquid market than bonds W, X, or Y

Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest?

Question

Consider the following four debt securities, which are identical in every characteristic except as noted: 
W: $\quad $A corporate bond rated AAA 
X:$\quad $ A corporate bond rated BBB
Y:$\quad $ A corporate bond rated AAA with a shorter time to maturity than bonds W and X
Z: $\quad $?A corporate bond rated AAA with the same time to maturity as bond Y that trades in a
More liquid market than bonds W, X, or Y

Which of the following is the most likely order of the interest rates (yields to maturity) of the bonds from highest to lowest?

Quizplus · Accepted Answer

The bond rated BBB (X) will have the highest yield to maturity due to its lower credit rating. Bond W is rated AAA and has a longer time to maturity than bond Y, so it should have a lower yield than Y. Bond Z is also rated AAA but trades in a more liquid market, which is a positive factor, so it should have the lowest yield. Therefore, the most likely order is X, W, Y, Z.

Consider the Following Four Debt Securities, Which Are Identical in Every