Multiple Choice
Which of the following is NOT a way in which a contract may be discharged by operation of law?
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9. Current Liabilities
Types of Liabilities
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On which of the following types of bonds is the prospect of default most likely?
A
Investment-grade corporate bonds
B
Municipal bonds
C
Junk bonds
D
Government bonds
Verified step by step guidance1
Understand the concept of bond ratings: Bonds are rated based on their creditworthiness, which reflects the likelihood of default. Ratings agencies like Moody's, S&P, and Fitch assign ratings ranging from 'investment-grade' (low risk) to 'junk bonds' (high risk).
Define junk bonds: Junk bonds, also known as high-yield bonds, are bonds with lower credit ratings (below 'BBB' by S&P or 'Baa' by Moody's). These bonds offer higher interest rates to compensate for the increased risk of default.
Compare the risk levels of the bond types: Investment-grade corporate bonds, municipal bonds, and government bonds are generally considered safer investments due to their higher credit ratings and lower default risk. Junk bonds, on the other hand, have a higher likelihood of default due to the issuer's weaker financial position.
Evaluate the prospect of default: Junk bonds are issued by entities with lower creditworthiness, making them more likely to default compared to investment-grade corporate bonds, municipal bonds, or government bonds.
Conclude the reasoning: Based on the definitions and risk levels, junk bonds are the type of bonds where the prospect of default is most likely.
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