Which of the Following Is Not True About Junk Bonds

question 12

Multiple Choice

Which of the following is not true about junk bonds?

• A) Junk bonds are either unrated or rated below investment grade by the credit rating agencies
• B) Typically yield about 1-2 percentage points below yields on U.S. Treasury debt of comparable maturities.
• C) Junk bonds are commonly used source of "permanent" financing in LBO transactions
• D) During recessions, junk bond default rates often exceed 10%
• E) Junk bond default risk on non-investment grade bonds tends to increase the longer the elapsed time since the original issue date of the bonds

---

Definitions:

Comparative Advantage

The capability of an entity to manufacture a product or provide a service at a reduced opportunity cost compared to its competitors.

Opportunity Cost

The cost of foregone alternatives, the value of the next best alternative that is given up when making a decision.

Comparative Advantage

The ability of a country or firm to produce a particular good or service at a lower opportunity cost than its competitors, leading to more efficient trade and production patterns.

Absolute Advantage

A situation in which a country, individual, or company can produce a particular good or service more efficiently than another party, using the same amount of resources.