When riskier corporations issue bonds that include a default premium,the promised yield will sometimes be:
A) less than the actual yield.
B) greater than the actual yield.
C) less than the yield on a default-free bond.
D) greater than the face value of the bond.

Question

Quizplus · Accepted Answer

The default premium is added to compensate for the higher risk of default by the corporation. Therefore, the promised yield will be greater than the yield on a default-free bond to attract investors. However, the actual yield may be higher or lower than the promised yield depending on market conditions and the performance of the issuing corporation.

When Riskier Corporations Issue Bonds That Include a Default Premium,the