Question

Which one of the following is TRUE? Select one: a. Yield to maturity of a defaultable...

Which one of the following is TRUE?

Select one:

a. Yield to maturity of a defaultable bond is lower than expected return of investing in the bond.

b. Default risk of investment-grade-bonds is greater than that of speculative-bonds.

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

d. During times of uncertainty, credit spread narrows.

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Answer #1

The yields to maturity of bonds with credit risk will be higher than the YTM of an identical default free bonds because of promised cash flows which have been calculated by Yield to maturity.so the investor pay lesser for the bonds with credit risk then they would for an otherwise identical default free bonds.

Other statements are false because at the time of uncertainty, credit spread will get more wider and Default risk of speculative bond will be higher and yield to maturity of defaultable bonds is higher than expected return.

Correct answer is option ( C).

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