Question

In​ 2012, an article in the Wall Street Journal had the headline​ "As Corporate-Bond Yields​ Sink, Risks for Investors​ Rise."

​Source: Matt​ Wirz, "As​ Corporate-Bond Yields​ Sink, Risks for Investors​ Rise," Wall Street Journal​, August​ 14, 2012.

The risks of holding​ long-term corporate bonds at low interest rates include the risk that​ _______​ and, more importantly for​ investors, the risk that​ ________.

a. the economy falls into a​ recession: there may be deflation in the future

b. the corporations will​ default: interest rates will fall further

c. the corporations will​ default: interest rates will rise

d. interest rates will fall​ further: the economy falls into a recession

Answer 1

We know that, any variable rate security has no interest rate (market) risk. A high coupon bond has lower market risk than a low coupon bond, but the risk still exists for this bond. Finally, long maturity bonds are more susceptible to market risk than short maturity bonds.

Larger the period of maturity bonds greater id the risk attached with them.

The correct option is (c).

the corporations will​ default: interest rates will rise.

Investors take the risk that interest rate will rise .

Hope you got the answer.

Thanks.