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Which of the following is not a factor in determining the required return on a bond?...

Which of the following is not a factor in determining the required return on a bond?

- Inflation rate

- Political risk

- Liquidity Risk

- Default risk

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Answer #1

Political risk is not a factor in determining the required return on a bond. Political risk does not affect the cash flows of the bond.

The bond price and inflation rate are inversely related to each other. Higher the inflation lower will be the bond price and vice versa.

Higher liquidity bonds attract higher prices and lower liquidity bonds attract lower prices because low liquidity is a risk.

Default risk is a major factor in bond return. If the issuer defaults, then the return on a bond can fall significantly.

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