You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know that Bluestone's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?

A) The longer term would tend to make the interest rate on the bond issued by Bluestone higher, while the higher risk would tend to make the interest rate lower.
B) The longer term would tend to make the interest rate on the bond issued by Bluestone lower, while the higher risk would tend to make the interest rate higher.
C) Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by Bluestone.
D) Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Bluestone.

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Emilee Moyer · Accepted Answer

Final Answer : D, Explanation :  Both the longer term of the bond and the higher risk associated with Bluestone Corporation's business ventures would tend to increase the interest rate on the bond. Longer terms generally come with higher interest rates due to the increased risk over time, and higher business risks demand higher returns to compensate investors for taking on those risks.

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