As default risk increases and bond prices adjust, the expected return on corporate bonds ________, and the return becomes ________ uncertain, everything else held constant.
A) increases; less
B) increases; more
C) decreases; less
D) decreases; more

Question

Quizplus · Accepted Answer

As default risk increases, investors demand higher yields to compensate for the increased risk, leading to higher expected returns. However, this also makes the return more uncertain, as the risk of default makes it less predictable whether those higher returns will be realized.

As Default Risk Increases and Bond Prices Adjust, the Expected