If there is a significant risk that the firm will default on its obligation,however,________ of the firm's debt,which is promised return,will ________ investors' expected return.

Question

Quizplus · Accepted Answer

The yield to maturity (the promised return) will overstate investors' expected return if there is a significant risk that the firm will default on its obligation. This is because investors are promised a certain return when they buy the debt, but if the firm defaults, they may not receive that promised return. Therefore, the yield to maturity will be higher than the actual return that investors will receive, leading to an overstatement of expected return.

If There Is a Significant Risk That the Firm Will