Question

Which of the following statements concerning bonds is (are) correct? :I. Municipal bonds have lower yields than Treasury bonds. :II. Low coupon bonds have higher yields than high coupon bonds. :III. General obligation bonds yield more than revenue bonds. :IV. Initially, callable bonds have higher yields than noncallable bonds.

	a.	I and III only
	b.	I and IV only
	c.	I, III and IV only
	d.	II and IV only

Answer 1

The yields on municipal bonds are typically lower than those of Treasuries because the interest on municipals is tax-exempt, whereas the interest on Treasuries is taxable. Investors, therefore require higher yields to invest in Treasuries.

Low coupon bonds have lower yield in the form of lower coupon payments. The higher yield bond will give you a higher return, in the form of coupon payments, but the default risk is higher. Yield to maturity includes the coupon rate within its calculation.

The general obligation bonds more safer than revenue bonds and thus pay a have a lower yield. General obligation bonds is backed by the full faith of the issuer whereas a revenue bond typically refers to a bond in which interest is paid and principal is repaid from a specific source of revenue pledged to the bond.

A callable bonds have a higher yield due to the fact that it has an option, that the issue can call these bond sin case the interest rate falls down. SO, it leaves the investors with a reinvestment risk and so, the investors have to be paid a higher yield to make them invest in such bonds.

So, the correct option is option 2.