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 interest rate 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 interest rate on corporate bonds increases relative to the interest rate on default-free bonds.

Question

Quizplus · Accepted Answer

As default risk increases, the probability of not getting the promised payments increases, making corporate bonds more risky than default-free bonds. Consequently, investors demand a higher return on these bonds, leading to an increase in their interest rate relative to the interest rate on default-free bonds.

Which of the Following Statements Is True