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An L.A. Lakers bond promised an investment rate of return of 9%. A Treasury bond of...

An L.A. Lakers bond promised an investment rate of return of 9%. A Treasury bond of the same maturity offers 6%. Is the LA Lakers bond necessarily a good investment? Explain.

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Answer #1

No, it is not necessary that LA Lakers bond is a good investment just because it is offering more return than Treasury Bond.

Returns should always be looked together with the risk involved in the investment.

Treasury bond is considered as risk free investment. So for some investors who are risk-averse, they might prefer to invest in treasury bond since probability of default is nil.

Returns in absolute terms does not make much sense. It should be always looked relative to risk involved.

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