Answer
Options from which a higher interest rate is expected are
a. A bond of an Eastern European government
b. A bond that repays the principal in the year 2040
c. A bond from a software company you run in your garage
d. A bond issued by the federal government
Work Step by Step
a. Investing in a stable government is considered to be of low risk compared to high risk associated with an unstable government. Therefore, a higher interest rate is expected from a high-risk bond of an Eastern European Government compared to a low-risk bond of the U.S. government
b. A bond that repays the principal after a longer time pays a higher interest due to the risk of having to wait longer for repayment of principal
c. A financially not so stable company is associated with high risk and hence pays a higher rate of interest compared to a financially stable company associated with low risk
d. The interest income on the state bonds are free from federal tax and hence offer a lower rate of interest compared to federal bonds, the interest on which are taxable
