If a corporation begins to suffer large losses, then the default risk on the corporate bond will ________, everything else held constant.
A) increase and the bond's return will become more uncertain, meaning the expected return on the corporate bond will fall
B) increase and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall
C) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will fall
D) decrease and the bond's return will become less uncertain, meaning the expected return on the corporate bond will rise

Question

Quizplus · Accepted Answer

If a corporation begins to suffer large losses, then the default risk on the corporate bond will increase. This means that the likelihood of the corporation defaulting on its bond payments has increased, making the bond's return more uncertain. As a result, investors will demand a higher return on the bond to compensate for the increased risk, causing the expected return on the corporate bond to fall.

If a Corporation Begins to Suffer Large Losses, Then the Default