SIE practice questionhardCredit/default risk
A bond with a BB rating is yielding significantly more than a government bond of similar maturity. What is the most likely reason?
- AHigher interest rate risk
- BHigher credit/default risk✓ Correct answer
- CHigher liquidity risk
- DHigher inflation risk
Explanation
Why B — Higher credit/default risk
BB-rated bonds are below investment grade and are compensating for their higher chance of default. The higher yield is not mainly due to liquidity, inflation, or interest rate risk.
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