Skip to content

ACCA Applied Skills · Financial Management · The nature and role of money markets

Which of the following would, other things being equal, be expected to cause the yield required on a corporate bond to be higher than that on a government bond of the same maturity?

Higher default risk combined with lower liquidity leads to a higher required yield on the corporate bond. Investors demand compensation, a risk premium, for the chance of not being repaid and for the difficulty of selling quickly, compared with a government bond of the same maturity.

  1. AThe corporate bond has a lower default risk than the government bond
  2. BThe corporate bond is more easily traded than the government bond
  3. CThe corporate bond carries a higher default risk and is less liquidCorrect
  4. DThe corporate bond is denominated in the same currency as the government bond

Explanation

Investors require a risk premium for default risk and for lower marketability, so a corporate bond with higher default risk and lower liquidity must offer a higher yield. Lower default risk or better tradability would reduce the required yield, and identical currency does not add any premium.

Did you get it right without looking?

One question tells you little. A timed set on The nature and role of money markets shows your real accuracy, how long you take and where you lose marks.

Practise The nature and role of money marketsFree diagnostic mock

More The nature and role of money markets questions