Empirically, Recessions Witness a Rise in Default Rates

question 7

Multiple Choice

Empirically, recessions witness a rise in default rates. Which of the following scenarios also accompanies the rise in default rates?

• A) Recovery rates rise.
• B) Loss given default (LGD) falls
• C) LGD rises
• D) LGD becomes highly volatile.

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Definitions:

Historical Return

Refers to the past performance of an investment or an index, usually expressed as a percentage change from the initial investment.

Small Stocks

These are shares of companies with a relatively small market capitalization, often considered to be more volatile but potentially offering higher returns compared to larger companies.

Long-Term Bonds

Bonds with a longer maturity period, typically more than 10 years, offering potentially higher yields but increased interest rate risk.

Treasury Bill

A short-term government security issued at a discount from the face value and pays no interest before maturing at its face value.