What are corporate obligations considered having a higher default risk and a lower credit rating?

Question

Options

• Acorporate bonds
• Bmunicipal bonds
• Cjunk bonds
• Dtaxation bonds

• A
  8% (2)
• B
  8% (2)
• C
  81% (21)
• D
  4% (1)

Explanation

Junk bonds (C) are corporate debt obligations rated below investment grade (BB or lower by S&P/Fitch, Ba or lower by Moody's), meaning they carry a significantly higher risk of default. Issuers - typically companies with weak financials or heavy debt loads - must offer higher interest rates to attract investors willing to accept that risk.

Why the distractors are wrong:

• A (corporate bonds) is too broad - it's the parent category that includes both investment-grade and junk bonds; not all corporate bonds have high default risk.
• B (municipal bonds) are issued by state/local governments, not corporations, and generally carry lower default risk due to tax-backed revenue streams.
• D (taxation bonds) is not a standard financial instrument category - this is a fabricated distractor.

Memory tip: Think of "junk" as the opposite of "treasure" - these bonds are discarded (low-rated) by conservative investors because the issuer's creditworthiness is questionable. The high yield they offer is the compensation for taking on that "junk" risk, which is why they're also called high-yield bonds.

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