Question

Which of the following statements is TRUE?

Multiple Choice

• You can earn high returns by purchasing zero-coupon bonds at a premium.

• As bond ratings go from AAA to AA to A, the return that investors require goes up.

• The lower the bond rating, the lower the default risk.

• With compound interest, interest is earned each period only on the original starting amount.

Answer 1

The correct statement is As bond ratings go from AAA to AA to A, the return that investors require goes up. Since whenever the bond's ratings goes down it implies that the bond now have greater chances of default or delaying payments to the investors. In such as case the investors requires a higher rate of return

As lower the bond rating goes, the default risk increases.

With compound interest, interest is earned not only on the principal, but also on the interest which is earned during the period.

Further we can earn higher returns in zero coupon bonds when we purchase it at a discount and not at a premium

So, the correct statement is As bond ratings go from AAA to AA to A, the return that investors require goes up.

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