Question

Indicate if each factor will lead to a higher or lower yield.

1. A. Lower
2. B. Higher

	1. A bond being tax-exempt (instead of being taxable)
	2. A bond have high default risk (compared to a bond with lower default risk)
	3. A bond with a call provision (compared to a bond without a call provision)
	4. A bond with a conversion option (compared to a bond that is not convertible)
	5. A bond that is very liquid (compared to a bond that is illiquid)

Answer 1

1. LOWER- tax exemption is a benefit so these will be offering a lower rate of return and hence it will be offering lower yield

2. HIGHER- if there is high default risk, then it will be compensating with higher yield.

3. HIGHER- call provision is a benefit to the the bond issuer and hence he will be providing a highe yield.

4. LOWER- Bond with conversion option is a benefit to the bondholder and they'll be accepting it for lower yield.

5. LOWER- Bond with liquidity is having a lower yield because they have the advantage of easy entry and exit.