M&B3 3rd Edition by Dean Croushore

Exercise 10

If you look in the fi nancial pages of the newspaper, you will see that interest rates differ dramatically for different bonds. For each of the following situations, which bond would you expect to have a higher interest rate Explain your reasoning.
a A U.S. government bond or a bond issued by Ford Motor Company, given that the market for U.S. government bonds is more liquid
b A U.S. government bond or a bond issued by IBM Corp., given that state and local governments cannot tax the interest earned on U.S. government bonds
c A bond issued by Microsoft Corporation or by Microsmart.com, given that Microsmart.com is near bankruptcy
d A 3-month government bond or a 30-year government bond, given that investors prefer short-term investments