SIE Exam Question 457: Answer and Explanation

Question: 457

When contrasting a corporate bond to a municipal bond of the same quality and maturity, you would observe which of the following?

• A. The corporate bond has a higher coupon rate.
• B. The municipal bond is more volatile.
• C. The corporate bond has a lower coupon rate.
• D. The corporate bond is more volatile.

Correct Answer: A

Explanation:

A: When comparing a corporate bond and a municipal bond of the same quality and maturity, the corporate bond would have a higher coupon rate. Interest earned on municipal bonds is free from federal income taxes and, as such, the coupon rate is lower than equal quality corporate bonds, which are subject to taxation.