Question

Tais 2. There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. A. True False

explain why its true

Answer 1

Answer:

TRUE

The given statement is true that there is an inverse relationship between the bond's quality ratings and its required rate of return. This is because the poor the rating of a bond is, higher will be the risk associated with it. The investors will not be willing to invest in a bond that has poor rating and higher risk. Thus, the return of such bonds is generally kept higher so as to attract investment.

Similarly, the bonds that have higher rating and less risk are more appealing to investors as it would guarantee return to them. Thus, the yield to maturity of such bonds or the return on such bonds is lower as compared to the poor rating bonds.