Coupon rates on newly-issued highly rated bonds are lower than those on lower-rated newly-issued bonds because of the risk-expected return trade-off.

Question

Quizplus · Accepted Answer

This is because highly-rated bonds are perceived as less risky and, therefore, investors demand a lower yield. On the other hand, lower-rated bonds are perceived as riskier and, therefore, investors demand a higher yield to compensate for the additional risk.

Coupon Rates on Newly-Issued Highly Rated Bonds Are Lower Than