Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.
A) JM bond, TC bond, B&O bond, IB bond
B) IB bond, B&O bond, TC bond, JM bond
C) TC bond, B&O bond, IB bond, JM bond
D) JM bond, IB bond, B&O bond, TC bond

Question

Quizplus · Accepted Answer

Generally, the higher the yield to maturity (YTM) on a bond, the higher the credit risk, as investors demand higher returns to compensate for taking on more risk. Therefore, the bond with the lowest YTM (IB bond, 4.49%) has the lowest credit risk, followed by the B&O bond (5.99%), then the TC bond (8.76%), and finally the JM bond (12.25%) with the highest YTM and thus the highest credit risk.

Rank the Following Bonds in Order from Lowest Credit Risk