ECONOMICS (CBSE/UGC NET)

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ECONOMICS

FINANCIAL MARKETS

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Typically, the interest rate on corporate bonds will be ____ the more restrictions are placed on management through restrictive covenants, because ____
A
higher; corporate earnings will be limited by the restrictions
B
higher; the bonds will be considered safer by bondholders
C
lower; the bonds will be considered safer by buyers
D
lower; corporate earnings will be higher with more restrictions in place
Explanation: 

Detailed explanation-1: -Government bonds issued by federal governments are among the safest investments around, often carrying the risk-free rate of return. However, because of their lower risk, they also carry relatively lower yields.

Detailed explanation-2: -Therefore, corporate bonds always earn a higher interest rate than Treasury bonds.

Detailed explanation-3: -Corporate bonds are typically seen as somewhat riskier than U.S. government bonds, so they usually have higher interest rates to compensate for this additional risk.

Detailed explanation-4: -Definition: Coupon rate is the rate of interest paid by bond issuers on the bond’s face value. It is the periodic rate of interest paid by bond issuers to its purchasers. The coupon rate is calculated on the bond’s face value (or par value), not on the issue price or market value.

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