Discuss whether the following statement is true or false:
The promised yield on corporate bonds will in general be higher than the expected yield.

Question

Quizplus · Accepted Answer

The promised yield on a corporate bond is higher than its expected yield because of default premium.Default premium is the amount of return that the investor requires to bear the risk of default of the corporate bond.Unlike government bonds,for corporate bonds there is a risk that the coupon or principal payments will not be met.Therefore,there is a difference between the promised yield of a corporate bond and the expected yield on the same bond.A corporate bond may promise a yield of 10% but is there is a risk of default associated with the bond its expected return could be 8%.This difference in promised and expected return is referred to as default premium.

Discuss Whether the Following Statement Is True or False