Question

1. Problems and Applications Q1

You would expect a bond of the U.S. government to pay ( a lower / a higher / the same ) interest rate as compared to a bond of an Eastern European government.

You would expect a bond that repays the principal in year 2040 to pay ( a lower / a higher / the same ) interest rate as compared to a bond that repays the principal in year 2020.

You would expect a bond of a software company you run in your garage to pay ( a lower / a higher / the same ) interest rate as compared to a bond issued by Coca-Cola.

You would expect a bond issued by New York State to pay ( a lower / a higher / the same ) interest rate as compared to a bond issued by the federal government.

Answer 1

1. A higher. This is because the US is more developed as compared to other Eastern European government countries. Thus, it will pay a lower rate of interest.

2. A higher. This is because the amount increases when the principal is invested for a greater duration of time.

3. A lower. This is because Coca Cola is a known brand with high brand value but there is limited information of the brand run in garage company.

4. A lower. This is because bonds issued by Central governments pay a higher interest rate as compared to the bonds issued by the federal government.