Question

why is a bond with a higher interest rate often considered a higher risk investment?
a. more secure bonds have higher interest rates.
b. a higher interest rate means a higher rate of return on the investment.
c. a higher interest rate would provide too much of a return on the investment.
d. some companies promise higher interest rates in order to attract the attention of investors.

Explanation:

To determine the correct answer, we analyze each option:

• Option a: More secure bonds typically have lower interest rates (since lower risk means lower return demanded), so this is incorrect.
• Option b: A higher interest rate means a higher rate of return, but this doesn't explain why it's higher risk. Higher return can be from higher risk, but the option doesn't address the risk - return relationship's cause for higher - risk perception.
• Option c: There's no inherent "too much return" that makes it risky. The risk is about the likelihood of getting the return, not the amount.
• Option d: Some companies with higher risk (e.g., less credit - worthy) offer higher interest rates to attract investors because they need to compensate for the higher risk of default or other issues. So this explains why a bond with a higher interest rate is often considered higher risk.

Answer:

d. Some companies promise higher interest rates in order to attract the attention of investors.