Question
What is default risk?
A.
The risk that the investor is not able to pay the face value of the bond.
B.
The risk that the company or government is not able to make interest payments.
C.
The risk that the investor demands the face value of the bond before the bond fully matures.
D.
The risk that the company or government is unable to pay back the investor.
A.
The risk that the investor is not able to pay the face value of the bond.
B.
The risk that the company or government is not able to make interest payments.
C.
The risk that the investor demands the face value of the bond before the bond fully matures.
D.
The risk that the company or government is unable to pay back the investor.
Answers
GPT-4o mini
Default risk primarily refers to the possibility that a borrower (such as a corporation or government) will fail to meet its debt obligations, which typically includes making interest payments or repaying the principal amount of a bond.
Therefore, the best answer to define default risk is:
**B. The risk that the company or government is not able to make interest payments.**
However, option D also captures the essence of default risk, so it could be argued that both B and D are correct, but B is more precise regarding the nature of default risk in the context of bond investing.
Therefore, the best answer to define default risk is:
**B. The risk that the company or government is not able to make interest payments.**
However, option D also captures the essence of default risk, so it could be argued that both B and D are correct, but B is more precise regarding the nature of default risk in the context of bond investing.