As their relative riskiness ________, the equilibrium price of corporate bonds ________ relative to the expected return on default-free bonds, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; does not change

Question

Quizplus · Accepted Answer

As the relative riskiness of corporate bonds increases, their expected return must also increase to compensate investors for taking on that extra risk. As a result, the equilibrium price of corporate bonds decreases, since investors will only buy them at a lower price to achieve the same return as they would from holding default-free bonds.

As Their Relative Riskiness ________, the Equilibrium Price of Corporate