Which one of the following statements is \"correct\" (true) with respect to \"si

Question

Which one of the following statements is "correct" (true) with respect to "similar" bonds? ["similar" other than to what is offered in the answers below => the same cash interest payment; the same time to maturity, etc.]?

a. generally a secured [collateralized] bond will be issued to yield a higher rate of interest than will a non-secured bond
b. generally a 10-year bond will be issued to yield a higher rate of interest than will a 15-year bond
c. generally a callable bond will be issued to yield a higher rate of interest than will a non-callable bond (callable means it can be redeemed by the issuer)
d. generally a convertible bond will be issued to yield a higher rate of interest than will a non-convertible bond (convertible means it can be converted to some other financial instrument, normally common stock, by the bond holder/owner)

Explanation / Answer

a.) is not correct as the risk is higher with a non-secured bond. Higher risk is higher reward. (think of mortgage vs. credit card. b.) not correct, being exposed to longer term carries higher risk. refer to a.) c.) is correct, as the callability of the loan creates a higher risk of not getting all your money on the deal. d.) not correct. the whole point of the convertible feature is to have a cheap financing option with an upside of conversion, which may or may not result in additional cash flow. as in you don't know if you are going to make money on the stock...

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