Holding everything else the same,if a corporation's earnings rise,then the default risk on its bonds will ________ and the expected return on those bonds will ________.
A) increase; decrease
B) decrease; decrease
C) increase; increase
D) decrease; increase

Question

Quizplus · Accepted Answer

If a corporation's earnings rise, it is considered as a positive sign indicating that the corporation is making more profits and becoming more financially stable. This will lead to a decrease in the default risk on its bonds, as the corporation will have a lower probability of defaulting on its payments. As a result, investors will require a lower return for holding the bonds, leading to an increase in the expected return on those bonds. Therefore, the correct choice is D - decrease; increase.

Holding Everything Else the Same,if a Corporation's Earnings Rise,then the Default