Final answer:
The statement about junk bonds is false because they typically offer a high rate of return, are issued by riskier corporations, are exceptionally risky, and are not usually tax-exempt as they are corporate, not municipal bonds.
Step-by-step explanation:
The statement about junk bonds is partially true, but there are inaccuracies as well. Junk bonds do carry a high risk as well as a high potential rate of return to compensate for that risk. They are not typically issued by municipalities but by corporations that are considered riskier borrowers. Such firms might be new, growing, or have less stable business models. Tax exemption usually applies to municipal bonds, not junk bonds. Therefore, claiming that junk bonds are usually tax-exempt is false.
A wise investor can indeed mitigate some of the risks associated with junk bonds by diversifying their bond investments across different companies. This is because it is less likely that all the companies will fail simultaneously. However, diversification does not remove the intrinsic high risk of these high-yield investments.