Question

If a bond is perceived to be more risky in terms of the ability of the company to repay the debt, then

Answer 1

Then it must offer to compensate investors for taking the risk.

Step-by-step explanation:

If a bond is perceived to be more risky in terms of the ability of the company to repay the debt, then it must offer investors higher returns in order to compensate them for the risk they took in buying their bonds.

However, If the company fails to compensate them, then the investors would shift their interest to other bonds.

Answer 2

Complete Question:

If a bond is perceived to be more risky in terms of the ability of the company to repay the debt, then the bond will have a lower interest rate.

Answer:

False

Step-by-step explanation:

The reason is that if higher the risk associated with the security the higher is the return demanded by the investor and vice versa. In this situation the credit risk is higher on the bond investment so the return demanded by the lender would be higher not lower than a bond with normal credit risk.