Western Governors University (WGU) BUS2040 D076 Finance Skills for Managers Practice Exam

Bonds are typically regarded as lower risk investments when they are issued by governments or stable companies because these entities are generally viewed as having a lower likelihood of defaulting on their debt obligations. Government bonds, particularly those issued by financially stable governments, are often considered among the safest investments because they are backed by the full faith and credit of the issuing government. Stable companies, which typically have a solid financial history and reliable cash flows, are also more likely to honor their debt commitments, making their bonds less risky in comparison to those issued by less stable firms.

In contrast, longer maturity bonds may be subject to greater interest rate risk, meaning their prices can be more volatile in response to changes in market interest rates. Higher coupon rates can signal that a bond carries more risk, as issuers may need to offer greater incentives to attract buyers if they are perceived as riskier investments. Similarly, bonds associated with frequent market price fluctuations indicate volatility and potentially higher risk, rather than stability and lower risk. Thus, the characteristics of bond issuers play a crucial role in determining the risk profile of the bonds.