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.
E)none of the above

Question

Quizplus · Accepted Answer

Historical evidence shows that firms are more likely to fail or suffer financial distress during periods of recession due to reduced demand, decreased consumer confidence, and tighter credit conditions. As a result, investors tend to require higher premiums to compensate for the increased default risk when investing in corporate bonds or lending to firms during recessions or periods of expected recession. Therefore, option D is the most correct statement.

Which of the Following Statements Is Most Correct