Question

Why is a bond with a higher interest rate often considered a higher risk investment?

Answer 1

Having a high interest rate doesn't make a bond higher risk. The cause and effect goes in the other direction: if a bond is higher risk, then investors demand a higher return. Consider two investment choices: you could put $100 in a bank and get paid $1 interest, or you could gamble $100 on a game of chance that pays out $101 if you win, or nothing if you lose. Unless you're a gambling addict, you won't take the risk of losing your money when the safe alternative pays just as much. But if the game pays the winner $200, then you might be interested. Likewise, companies that have a higher risk of defaulting need to promise a higher interest rate on their bonds in order to get anyone to choose them over safe investments.

Answer 2

Answer:

D

Step-by-step explanation:

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