Which of the Following Statements About Junk Bonds Is FALSE

question 21

Multiple Choice

Which of the following statements about junk bonds is FALSE?

• A) Given the likelihood of default, it is never profitable to purchase junk bonds.
• B) They pay higher interest rates than investment grade bonds due to higher perceived risk.
• C) Prior to the 1970s, corporations were unable to issue junk bonds.
• D) In October 2016, the average yield on junk bonds was more than twice the average yield on investment grade bonds.

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Definitions:

Interest Rates

The proportion of a total amount of money levied for borrowing it, usually represented as an annual rate.

Pure Time Value

Pure time value is the concept in finance that money available now is worth more than the same amount in the future due to its potential earning capacity.

Term Structure

The relationship between interest rates (or yields) and different terms (or maturities) for debt securities.

Liquidity Premium

The additional return that investors require for holding securities with low liquidity, compensating them for the higher risk associated with difficulty in selling the asset quickly at its fair market value.