Holding everything else constant,if a corporation begins to suffer large losses,then the default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase: increase
B) decrease; increase
C) increase; decrease
D) decrease; decrease

Question

Quizplus · Accepted Answer

If a corporation suffers large losses, its ability to make interest and principal payments on its bonds decreases, which increases the risk of default on those bonds. As a result, investors will demand a higher expected return to compensate for the increased default risk, leading to a decrease in the price of the bonds and an increase in their expected return.

Holding Everything Else Constant,if a Corporation Begins to Suffer Large