Question

Default risk

A) is the probability that a borrower will not pay in full the promised coupon or principal.
B) exists only for the bonds of small corporations.
C) is also known as market risk.
D) is zero for bonds issued by cities and states.

Answer 1

Default risk is the probability that a borrower will not pay in full the promised coupon or principal of a bond. It exists for all types of bonds, not just those issued by small corporations. Bonds with higher default risk typically offer higher interest rates.

Step-by-step explanation:

Default risk refers to the probability that a borrower will not fully pay the promised coupon or principal of a bond. It is not limited to the bonds of small corporations and exists for bonds issued by all types of entities including cities and states. Default risk is also known as credit risk. Bonds with higher default risk typically offer higher interest rates to compensate investors for the increased risk.