Which of the following statements is most correct?
A) More firms fail or suffer financial distress during periods of economic expansion than during periods of economic recession. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
B) More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
C) Fewer firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
D) More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.

Question

Quizplus · Accepted Answer

The statement "More firms fail or suffer financial distress during periods of recession than during periods of economic expansion" is supported by historical data and economic theory. When the economy is in a recession, consumer spending and business investment tend to decline, leading to lower revenues and higher costs for firms. This can make it more difficult for some firms to meet their financial obligations and can increase the likelihood of default. Investors tend to require higher premiums to compensate for default risk during recessions or when the economy is expected to enter one.

Which of the Following Statements Is Most Correct