What financial return is considered fair for the bonds based on their risk?

A fair financial return on bonds is typically determined by considering the associated risk of the bonds, which is reflected in the yield or interest rate that investors require to compensate them for that risk. Bonds with higher risks, such as those issued by companies with lower credit ratings or those with longer maturities, generally offer higher returns to entice investors who might be concerned about potential defaults or interest rate fluctuations.

In this context, if the selected answer is viewed as 4%, it suggests that this return reflects an appropriate balance between the risk associated with the bonds in question and the need for a competitive yield. It indicates that investors expect a return that compensates them adequately for the specific risks they are taking without being excessively high.

Other options indicate yields that may be interpreted as too low or too high relative to the risk profile of the bonds. A return of 3% may be seen as insufficient compensation for taking on the risk of the bonds, particularly in environments where inflation or interest rates rise. Conversely, yields of 5% or 6% might suggest an increase in risk that may not correspond to the actual risk presented by these bonds if considered low to moderate risk.

Thus, a return of 4% can be understood as a fair market return for bonds