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

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BlackTom AI · Accepted Answer

The question presents a fill-in-the-blank about corporate bonds and their returns, asking us to select the pairing that makes sense given typical bond risk–return relationships.
Option A: 'lower-rated; higher' — This aligns with the fundamental risk–return tradeoff. Lower-rated (higher‑risk) bonds must offer higher potential returns to compensate investors for taking on more credit risk and default probability.
Option B: 'lower-rated; lower' — If a bond is lower-rated but offers a lower return, that would contradict the risk premium principle: investors would not be compensated for accepting greater default risk, making this pairing inconsistent with standard finance theory.
Option C: 'higher-rated; higher' — Higher-rated bonds are considered safer with lower default risk, and typically offer lower yields. Pairing 'higher-rated' with a 'higher' return would be atypical because the safer credit profile usually corresponds to more modest returns, not elevated ones.
In addition, the phrase 'lower-rated' is commonly associated with higher yields due to risk premia, while 'higher-rated' would correspond to lower yields given stronger credit quality. Therefore, the only option that correctly matches the established relationship between credit quality and yield is the first one.

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A(n) corporate bond will pay a return.

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BUSFIN 1200 AU2025 (2014) Final Exam- Requires Respondus LockDown Browser

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

View Explanation

Log in for full answers

Similar Questions

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

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 ________.

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

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

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.

In a consumer society, many adults channel creativity into buying things

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 .