Question

Which of the following statements is FALSE?

Select one:

A. For corporate bonds, the issuer may default—that is, it might not pay back the full amount promised in the bond certificate.

B. Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.

C. The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.

D. The risk of default, which is known as the credit risk of the bond, means that the bond's cash flows are not known with certainty

Answer 1

Statement C is false

Lets Understand why

The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond

In corporation corparate bonds are issued and the risk they carry is default risk that is the company defaults in payment of interest and principal.The yield to maturity is considered to be HIGHER than the expected return of investing in the bond.Also the promised cash flows are used hence not actual one in case of default risk bond.

You can understand with this eg.A company issues 10%bond of $1000 however if company pays back $900 that is 10% default occuts ytm Is calculated on 1000 that is promised and not actual flow.Hence higher.

Rest all the statements are true.

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