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.

Answer 1

in essence it boils down to, when investing, you take risks all the time, the money is going to be invested on some expenditure that may work or not work, if it doesn't work, your money is Kaput, and if it works, how much are you getting back? 2%, 17%? or whatever.

If a company would like you to invest and provides you with 2% return, is kinda low but the issue is that whatever they're going to use it for and the health of their finances is such that you'll get 2%, or the probability of you getting that much is pretty good.

Now, if the same company instead offers 35% return on investment, hell that's high, the hell is going on? Why are they so generous?

Well, they're not really being generous, the issue is the probability that you'll get that much is not really that good, there's a good chance your money will go Kaput, so the risk is really much higher, before you invest you're told of those chances, hmmmm should you do it knowing there's a good chance of being left just holding an empty bag? So you'd hesitate and possibly say forget it, unless the returns make it tilt that balance. So the investors get attracted by the higher percent of return, but is always counter-balanced with the risk associated with it.