Question

A bond with default risk will always have a ________ risk premium, and an increase in its default risk will ________ the risk premium.

A) positive; raise
B) positive; lower
C) negative; raise
D) negative; lower

Answer 1

The correct answer to the bond risk question is A) positive; raise. For financial market changes, a rise in supply leads to lower interest rates and an increase in demand or supply leads to more loans being made and received.

Step-by-step explanation:

A bond with default risk will always have a positive risk premium, and an increase in its default risk will raise the risk premium. Therefore, the correct answer is A) positive; raise. When it comes to changes in the financial market affecting interest rates and loan quantities:

1. A rise in supply of loanable funds generally leads to a decline in interest rates.
2. An increase in either demand or supply will lead to an increase in the quantity of loans made and received, although for different reasons. A rise in demand increases competition among borrowers, pushing up the quantity borrowed. An increase in supply means more funds are available for loans, also increasing the number of loans made.