Which of the following statements about bonds is true?

Which of the following statements about bonds is true?

a) Bond interest rates fall with increased default risk.

b) Bond interest rates and default risk are not related.

c) Bond prices rise with increased default risk.

d) Bond prices rise with increased interest rates.

e) Bond interest rates rise with increased default risk.

Answer: e) Bond interest rates rise with increased default risk.

A bond is a financial obligation, in which an investor obtains a fixed interest in return for the promise to repay the borrowed amount at a later date. The rate of interest payable on a bond corresponds to the risk element in the fundraising exercise. Higher default risk, which is the probability that the security issuer will default on the interest payments or the principal, implies that the investors require higher interest rates on the securities to compensate them for this added risk. On the other hand, cheaper and more appealing credit tends to come with a lower default risk if set correctly. What this means is default risk and what governments charge for borrowing through bonds is a critical pillar in the bond market.