Which of the following statements are TRUE? A) A decrease in default risk on corporate bonds...
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?
Homework Answers
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..
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