Final answer:
The corporate bond will have a higher yield than the state government bond because it carries a higher risk of default, thus requiring a higher compensation for investors. State government bonds are generally considered more secure and therefore have lower yields. The correct option is B.
Step-by-step explanation:
When comparing the yield of bonds with the same term to maturity, several factors need to be considered, particularly the creditworthiness of the issuer. Since the first bond mentioned in the scenario was issued by a state government with a low probability of default, it is generally considered to be more secure than the corporate bond with a higher probability of default. Investors require a higher yield for taking on additional risk, which means that the bond with the higher default risk will have to offer a higher yield to attract investors.
In this context, the correct answer to the question is: 2) The corporate bond will have a higher yield than the state government bond. This is because the corporate bond carries a higher risk of default, and investors need to be compensated for taking on this higher level of risk. As established, corporate bonds typically pay a higher interest rate than Treasury bonds, including state government bonds, because firms are considered riskier borrowers when compared to government entities.
Moreover, the financial markets recognize this difference in risk through bond ratings, such as those provided by Moody's, which help investors assess the safety of the bonds. Nonetheless, despite this difference in yield, it is important to note that the fluctuations in interest rates for corporate bonds and government bonds are often correlated, moving up and down together based on overall market conditions.