Question

Which of the following statements are TRUE?

A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but increases the demand for default-free bonds.

B) The expected return on corporate bonds decreases as default risk increases.

C) A corporate bond's return becomes less uncertain as default risk increases.

D) As their relative riskiness increases, the expected return on corporate bonds increases relative to the expected return on default-free bonds.

Answer: B

WHY ACD FALSE?

Answer 1

Option B is correct.

Option A is false because a decrease in default risk on corporate binds increases the demand for these bonds.

Option C is incorrect because A corporate bond's return becomes more uncertain as default risk increases.

As their relative riskiness increases, the expected return on corporate bonds decreases relative to the expected return on default-free bonds..