Final answer:
The coupon rate of a bond will typically be higher for bonds with longer terms, higher default risks, and those that are subject to federal income tax.
Step-by-step explanation:
The coupon rate on a new bond issue will generally be higher if the term is longer, default risk is higher, and is taxable for federal income tax purposes.
Bonds are debt securities under which the issuer owes the holders a debt and, depending on the terms, is obligated to pay them interest (the coupon) and repay the debt at a later date (maturity date). When a bond is issued, investors assess the term length, default risk, and tax considerations to determine the attractiveness of the bond. For instance, firms viewed as riskier borrowers will need to offer a higher coupon rate to compensate for the increased risk of default. This is why high-yield bonds, also known as junk bonds, offer relatively high interest rates. Similarly, bonds subject to federal income tax may need to provide higher rates to attract investors.