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Rank the following taxable bonds from lowest yielding to highest yielding. I. U.S. Treasury...

Question:

Rank the following taxable bonds from lowest yielding to highest yielding.

I. U.S. Treasury bonds

II. Corporate bonds

III. Agency bonds

A) I, III, II

B) I, II, III

C) II, I, III

D) III, II, I

Bond Yield:

A bond's yield is a figure showing the return that an investor realizes from a bond. It is arrived at by dividing the face value of a bond by the amount of interest the bond pays. A taxable bond is a bond whose returns to an investor are taxable at state, local or federal levels.

Answer and Explanation: 1

The correct answer is A) I, III, II

U.S. Treasury bonds typically offer lower interest rates than agency and corporate bonds. The higher the default risk of a bond, the higher the interest rate that it offers to compensate investors for the high risk of default. The higher the interest rates of a bond, the higher its yield. U.S treasury bonds are default-free securities; therefore, they offer the lowest interest rates of the three types of bonds. Agency bonds are also safe investments and are usually compared to treasury bonds due to their high liquidity and low risk of default. Corporate bonds have the highest default risk of the three types of bonds and thus offer the highest interest rates and yield the highest. The correct ranking of the bonds from the type of bond with the lowest yield is U.S. Treasury bonds, followed by agency bonds and corporate bonds. Therefore option a) is the correct answer, and choices b) c) and d) are incorrect.


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Determinants of Bond Yields

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Chapter 7 / Lesson 7
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Bond yield is the return on investment from a given bond, calculated by evaluating several factors. Explore the determinants of bond returns, bond yields, and the yield curve including initial prices and yield changes over time.


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