Final answer:
D. All factors mentioned (uncertainty about company's payment ability, the term of the loan, and level of interest rates in the economy) are relevant in determining a company's bond coupon rate. The coupon rate compensates for credit risk, duration, and matches prevailing interest rates.
Step-by-step explanation:
The determination of the coupon rate for a company's bonds involves several factors. However, the answer to the question, 'Which of the following is NOT a factor that determines the coupon rate of a company's bonds?' is D. All of these are factors that determine the coupon rate of a company's bonds.
The coupon rate is influenced by the level of uncertainty about the company's ability to make payments (credit risk), the term or duration of the bond, and the prevailing interest rates in the economy at the time of issuance.
The rate is set higher for longer maturity and higher risk to compensate the investor for taking on additional risk.
Economically, if the overall interest rates increase, new bonds will have to offer higher coupon rates to be attractive to investors. In contrast, if market rates decrease, new bonds can have lower coupon rates and still be sellable.