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Which of the following statements is true?
A) A decrease in default risk on corporate bonds lowers the demand for these bonds, but
increases the demand for default-free bonds.
B) The expected return on corporate bonds decreases as default risk increases.
C) A corporate bond's return becomes less uncertain as default risk increases.
D) As their relative riskiness increases, the expected return on corporate bonds increases relative
to the expected return on default-free bonds.
Answer: B
Diff: 2 Type: MC Page Ref: 114
Skill: Applied
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates
The spread between interest rates on low quality corporate bonds and Canada bonds
____.
A) widens significantly during recessions
B) narrows significantly during recessions
C) narrows moderately during recessions
D) does not change during recessions
Answer: A
Diff: 3 Type: MC Page Ref: 114
Skill: Applied
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates
As their relative riskiness ____, the expected return on corporate bonds ____
relative to the expected return on default-free bonds, everything else held constant.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; does not change
Answer: B
Diff: 1 Type: MC Page Ref: 115
Skill: Applied
Objective List: 6.1 Describe how default risk, liquidity, and tax considerations affect interest
rates