Question

Which of the following bonds is considered to have the greatest default risk?

1) Corporate bonds
2) Municipal bonds
3) Treasury bonds
4) Government bonds

Answer 1

The correct option is: Corporate bonds

Corporate bonds generally carry the greatest default risk due to the potential for business downturns affecting the corporation's ability to pay its debts, whereas treasury and other government bonds have much lower risks as they are backed by government resources.

Step-by-step explanation:

When evaluating which type of bond has the greatest default risk, it is imperative to consider the financial stability and payment assurance of the issuers. Corporate bonds have a higher default risk compared to municipal bonds, treasury bonds, and other government bonds. The risk level for corporate bonds is heightened due to the potential for business failures or economic downturns that can adversely affect a corporation's ability to meet its bond payment obligations.

While corporate bonds are often rated by agencies such as Moody's, which provide an assessment of their safety, these ratings are not infallible. In contrast, treasury bonds, backed by the full faith and credit of the U.S. government, and municipal and other government bonds, supported by tax revenues or government guarantees, typically present substantially lower default risks.