Which of the following statements about junk bonds is FALSE?
A) Given the likelihood of default, it is never profitable to purchase junk bonds.
B) They pay higher interest rates than investment grade bonds due to higher perceived risk.
C) Prior to the 1970s, corporations were unable to issue junk bonds.
D) In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds.

Question

Quizplus · Accepted Answer

It is not necessarily true that it is never profitable to purchase junk bonds. Although they do have a higher likelihood of default, they also offer higher interest rates, which can potentially offset any losses from defaults. Investors who are willing to take on additional risk may see a profit from investing in junk bonds.

Which of the Following Statements About Junk Bonds Is FALSE