Risk of default implies that:
A)there is an upward-sloping yield curve.
B)there is a downward-sloping yield curve.
C)AAA-rated bonds are more heavily discounted than BBB-rated bonds.
D)AAA-rated bonds are less heavily discounted than BBB-rated bonds.

Question

Quizplus · Accepted Answer

Risk of default means that there is a higher probability that the borrower will not be able to repay the loan or interest on the bond. As a result, investors demand higher returns from bonds that have a higher risk of default. This translates into higher discounts for bonds that have lower ratings, such as BBB, and lower discounts for bonds that have higher ratings, such as AAA. Therefore, option D is the correct answer.

Risk of Default Implies That