What are high yield corporate bonds characterized by?

What are high yield corporate bonds characterized by?

• A. Low risk of default with low interest rates
• B. A government guarantee of returns
• C. Greater estimated default risk coupled with higher interest rates
• D. Fixed interest rates that do not vary

Answer: (C)

High yield corporate bonds are characterized by greater estimated default risk coupled with higher interest rates. These bonds are issued by companies that have lower credit ratings, which indicates a higher likelihood that the issuer may be unable to meet its debt obligations. As a result, to attract investors, these bonds offer higher yields compared to corporate bonds with higher ratings that are deemed safer. The higher interest rates compensate investors for taking on the additional risk of potential default. This characteristic of high yield corporate bonds reflects the fundamental principle of the risk-return relationship in finance, where higher risks are associated with the potential for higher returns. This makes high yield bonds appealing to investors seeking greater income opportunities, albeit at the cost of increased risk.

High yield corporate bonds are characterized by greater estimated default risk coupled with higher interest rates. These bonds are issued by companies that have lower credit ratings, which indicates a higher likelihood that the issuer may be unable to meet its debt obligations. As a result, to attract investors, these bonds offer higher yields compared to corporate bonds with higher ratings that are deemed safer. The higher interest rates compensate investors for taking on the additional risk of potential default.

This characteristic of high yield corporate bonds reflects the fundamental principle of the risk-return relationship in finance, where higher risks are associated with the potential for higher returns. This makes high yield bonds appealing to investors seeking greater income opportunities, albeit at the cost of increased risk.