Question

You would expect a bond issued by the federal government and a bond issued by New York State to pay different interest rates because of differences in the bonds' ________.

1) maturity dates
2) credit ratings
3) face values
4) coupon rates

Answer 1

Bonds issued by the federal government and New York State are expected to pay different interest rates due to differences in their credit ratings.

Step-by-step explanation:

In financial terms, a bond has several parts. A bond is basically an "I owe you" note that an investor receives in exchange for capital (money). The bond has a face value. This is the amount the borrower agrees to pay the investor at maturity. The bond has a coupon rate or interest rate, which is usually semi-annual, but can be paid at different times throughout the year.

The bond also has a maturity date when the borrower will pay back its face value as well as its last interest payment. The bond issued by the federal government and the bond issued by New York State are expected to pay different interest rates because of differences in their credit ratings. Credit ratings represent the issuer's ability to repay the bond's principal and interest on time. Bonds issued by entities with different credit ratings are associated with different levels of risk, which affects the interest rates they offer to investors.