ACCA Advanced Financial Management (AFM) Practice Exam

Disable ads (and more) with a membership for a one time $4.99 payment

Get ready for your ACCA AFM Exam with in-depth study tools! Engage with flashcards, multiple choice questions, detailed explanations, and hints. Elevate your exam preparation skills!

Practice this question and more.

What type of bond is classified as a junk bond?

Bond with rating below Baa or BBB
Bond that is repaid early
Bond yielding low interest rates
Bond guaranteed by the government

The correct answer is: Bond with rating below Baa or BBB

A bond classified as a junk bond is characterized by a lower credit rating, specifically one that falls below Baa from Moody's or BBB from Standard & Poor's. These ratings indicate a higher risk of default, meaning that the issuer may struggle to make interest payments or repay the principal when due. Investors typically demand higher yields on junk bonds to compensate for this increased risk. The classification of junk bonds is significant because it helps investors assess the risk-return profile of their investments. While they can potentially offer attractive returns, they also come with the possibility of high volatility and the chance of losing principal. Understanding this classification is crucial for investors considering their portfolio's risk exposure and investment strategy.