Which of the following statements is most correct? A) More firms fail or suffer

Question

Which of the following statements is most correct?
A) More firms fail or suffer financial distress during periods of economic expansion than during periods of economic recession. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
b) More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
C) Fewer firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
D) Fewer firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one.
E) none of the above

Explanation / Answer

E. None of the answers make sense. When you are in an expansion a rising tide raises all boats. In a recession people are going to demand higher premiums because there is a higher chance weaker firms will fail.

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