Which of the following statements concerning junk bonds is MOST correct?
A) A rational investor will always prefer a AAA-rated bond to a junk bond.
B) Junk bonds have higher interest rates than AAA-rated bonds because of the higher risk.
C) Junk bonds may also be called low-yielding securities.
D) Junk bonds are priced higher than AAA-rated bonds because junk bonds are more risky.

Question

Quizplus · Accepted Answer

Junk bonds have higher interest rates than AAA-rated bonds because they are more risky. This higher risk is reflected in the higher interest rate offered to investors as compensation for taking on additional risk. A rational investor may still choose to invest in a junk bond if they believe the potential return justifies the increased risk. Statements A, C, and D are false.

Which of the Following Statements Concerning Junk Bonds Is MOST