Question

Which of the following types of bonds offer relatively high rates of interest because they have higher inherent risks?

a) Corporate bonds
b) Municipal bonds
c) Treasury bonds
d) Savings bonds

Answer 1

High rates of interest due to higher inherent risks are characteristic of corporate bonds. These bonds compensate investors for the increased risk of default compared to government-issued bonds.

Step-by-step explanation:

The type of bonds that offer relatively high rates of interest to compensate for their higher inherent risks are corporate bonds. Unlike municipal bonds, Treasury bonds, or savings bonds, corporate bonds come with a higher risk of default because they are issued by firms rather than the government. The interest rates for corporate bonds are set higher to attract investors, despite the risk involved.

Firms with a higher chance of default, especially those growing or with unstable business models, tend to issue high-yield bonds or junk bonds to offer even greater compensation for the risk taken on by bondholders. Historically, some well-known companies have issued junk bonds to raise capital during their growth phases.