If a corporation begins to suffer large losses,then the default risk on the corporate bond will
A)increase and the bond's return will become more uncertain,meaning the expected return on the corporate bond will fall.
B)increase and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall.
C)decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will fall.
D)decrease and the bond's return will become less uncertain,meaning the expected return on the corporate bond will rise.

Question

Quizplus · Accepted Answer

If a corporation begins to suffer large losses, the default risk on the corporate bond will increase, which means there is a higher chance that the corporation will fail to make interest and principal payments on the bond. As a result, investors will demand a higher return to compensate for the increased risk, causing the expected return on the corporate bond to fall. The bond's return will also become more uncertain, as there is a greater possibility that the investor will not receive the promised payments.

If a Corporation Begins to Suffer Large Losses,then the Default