Bonds with AAA rating generally offer lower yields than bonds with BB rating

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BlackTom AI · Accepted Answer

Consider the statement presented: bonds with AAA rating generally offer lower yields than bonds with BB rating.
Option a: True. In general, higher credit quality (AAA) implies lower risk of default, which tends to result in lower required return by investors, hence a lower yield compared to lower credit quality (BB). This aligns with risk-return tradeoffs observed in fixed-income markets and credit rating-based yield spreads.
Option b: False. If one argued that AAA bonds do not have lower yields than BB bonds, they would be overlooking the core principle that lower credit risk typically commands a smaller yield premium. BB bonds carry higher credit risk, so investors demand higher yields to compensate for that additional risk, making the statement that AAA yields are not lower incorrect.
Option a is consistent with standard credit risk assessment and yield pricing, while option b contradicts the established relationship between credit quality and yields. The comparison hinges on credit risk: higher quality generally means lower yield, and lower quality generally means higher yield, all else equal.
Option a is the only statement that reflects the conventional inverse relationship between credit rating and yield; option b fails to recognize this fundamental dynamic in bond pricing.

MCD2170 Foundations of Finance - Trimester 1 - 2025

Bonds with AAA rating generally offer lower yields than bonds with BB rating

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MCD2170 Foundations of Finance - Trimester 1 - 2025

Bonds with AAA rating generally offer lower yields than bonds with BB rating

View Explanation

Log in for full answers

Similar Questions

A(n) ________ corporate bond will pay a ________ return.

What is the bond rating cutoff for a bond to be classified as a junk bond?

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Rank these bonds in order from most secure (investment grade) to least secure (non-investment grade/ junk) based on ratings from Standard & Poor's (S&P): Tesla Bond (BB+) 4 Government of Canada Bond (AAA) [ Select ] 2 4 1 3 Netflix Bond (BBB) [ Select ] 4 3 2 1 Walmart Bond (AA) 2

What is the highest rating a bond can have?

A company with a BBB bond rating will command a higher interest rate on its bonds than a company with a AA bond rating.

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

A(n) corporate bond will pay a return.

Bonds with relatively low risk of default are called securities and have a rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a higher default risk and are called .