Certified Plan Sponsor Professional (CPSP) Practice Exam

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Which type of bond investment is often viewed as high risk with the potential for high returns?

  1. Government bonds.

  2. Investment-grade corporate bonds.

  3. High-yield bonds, also known as junk bonds.

  4. Municipal bonds.

The correct answer is: High-yield bonds, also known as junk bonds.

High-yield bonds, often referred to as junk bonds, are considered high risk investments due to the lower credit ratings of the issuers. These bonds typically offer higher yields compared to more secure bond options because they compensate investors for the additional risk associated with default. The potential for high returns attracts investors looking for opportunities to earn more from their bond investments; however, this comes with the understanding that there is a significant risk of losing some or all of the investment if the issuer fails to meet its obligations. This duality of high reward and significant risk is fundamental to the appeal of high-yield bonds, distinguishing them from more stable investment-grade corporate bonds and government securities, which carry lower risk and thus lower potential rewards.