Which of the following statements is 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.

Question

Quizplus · Accepted Answer

An increase in default risk on corporate bonds will increase the expected return on these bonds to compensate for the increased risk. Therefore, as default risk increases, the expected return on corporate bonds increases. Choice A is incorrect because a decrease in default risk on corporate bonds would increase the demand for these bonds as they become less risky. Choice C is incorrect because an increase in default risk means the return on the bond becomes more uncertain. Choice D is incorrect because as relative riskiness increases, the expected return on corporate bonds decreases relative to default-free bonds.

Which of the Following Statements Is True