You are thinking of buying a bond from Knight Corporation. You know that this bond is long term and you know that Knight’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 Knight 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 Knight 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 Knight.
d. Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Knight.
e. The bonds from both companies would carry the same interest rate as those rates are set by the Federal Reserve.