Under default risk, which bond issuer would generally be considered higher risk?

• A. U.S. government bonds
• B. Risky company bonds
• C. Blue-chip corporation bonds
• D. Municipal bonds with high rating

Answer: (B)

Default risk depends on the issuer’s ability to make promised payments. Companies that are risky have weaker finances and more volatile earnings, so they’re more likely to miss interest or principal payments, making their bonds higher risk. U.S. government bonds are considered essentially default-free, so their risk is very low. Blue-chip corporations are large and financially sturdy, which lowers their risk relative to risky firms, though they’re still riskier than government bonds. Highly rated municipal bonds are also low risk due to strong backing or support. Therefore, the issuer with the highest default risk among these options is the risky company.