Question

Which bond would you expect to pay the highest interest rate?

a. a bond issued by the U.S. governmentb.
b. a bond issued by General Motorsc.
c. a bond issued by New York Stated.
d. a bond issued by a new restaurant chain

Answer 1

The bond that should pay the highest interest rate is:

d. a bond issued by a new restaurant chain.

Step-by-step explanation:

This is based on the fact that the new restaurant chain is untested, has higher risk profile and the bondholders are assuming higher risks, and the bond cannot be compared to the bonds issued by the US government, New York State, and General Motors, in that order. The new restaurant chain will be offering a higher rate of return than others because it is new to the bond market and would like to attract potential bond investors. Without the higher rate, therefore, it will not be successful in the bond issuance.