Which of the following statements is FALSE?
A)Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B)The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.
C)The risk of default,which is known as the credit risk of the bond,means that the bond's cash flows are not known with certainty.
D)For corporate bonds,the issuer may default-that is,it might not pay back the full amount promised in the bond certificate.

Question

Quizplus · Accepted Answer

The yield to maturity of a defaultable bond is not necessarily equal to the expected return of investing in the bond. The yield to maturity takes into account the time value of money and the uncertainty of receiving future cash flows, including the possibility of default. The expected return, on the other hand, only considers the probability-weighted average of the potential outcomes, and does not account for the time value of money.

Which of the Following Statements Is FALSE