Asked by Brooke Patterson on Jul 08, 2024
Verified
If investors are uncertain that a corporate bond issuer will make all of the bond payments as promised, the investors will demand a higher yield in the form of:
A) An increased inflation premium.
B) An increased interest rate risk premium.
C) An increased default risk premium.
D) An increased liquidity risk premium.
E) An increased real rate of interest.
Default Risk Premium
The portion of a nominal interest rate or bond yield that represents compensation for the possibility of default.
Inflation Premium
The extra yield on an investment that investors require as compensation for the loss of purchasing power due to inflation.
Bond Payments
The regular interest payments made to bondholders, as well as the return of principal at the bond's maturity date.
- Acquire knowledge of the multiple risk premiums related to bond investments.
Verified Answer
BH
Brandon HerreraJul 13, 2024
Final Answer :
C
Explanation :
The increased default risk premium compensates investors for the risk that the bond issuer may not make all payments as promised, reflecting concerns about the issuer's ability to fulfill its financial obligations.
Learning Objectives
- Acquire knowledge of the multiple risk premiums related to bond investments.