The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

Question

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Junk bonds are bonds that are rated below investment grade (BB or lower). These bonds are considered higher risk because they have a higher likelihood of defaulting. As a result, investors demand a higher yield to compensate for the additional risk. AAA-rated bonds, on the other hand, are considered lower risk because they have a lower likelihood of defaulting, and therefore offer a lower yield.

The Expected Yield on Junk Bonds Is Higher Than the Yield