Question

Which of the following statements about the term of a bond is correct? a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment. b. The term of a bond is determined entirely by its credit risk. c. The term of a bond is determined entirely by how much sales charge the buyer of the bond pays when he or she purchases the bond. d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds.

Answer 1

Answer: Option D

Explanation: In simple words, term of bond refers to the time period till the maturity of the bond. Thus, long term bonds refers to the bonds which have maturity period more than one year and short term bonds are the one which have a maturity period of less than one year.

The interest rate on long term bonds is high due to the fact that the investor has to block his or her money for a longer time period exposing him to the risk of insolvency of the company due to change in any environmental factor.

Hence from the above we can conclude that the correct option is D.