(I)If a corporation suffers big losses,the demand for its bonds will rise because of the higher interest rates the firm must pay.
(II)The spread between the interest rates on bonds with default risk and default-free bonds is called the risk premium.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

Question

Quizplus · Accepted Answer

(I) is false because if a corporation suffers big losses, the demand for its bonds is likely to fall due to increased risk of default, not rise. (II) is true as the spread between interest rates on bonds with default risk and those without (default-free bonds) is indeed referred to as the risk premium, reflecting the additional risk investors take on.

(I)If a Corporation Suffers Big Losses,the Demand for Its Bonds