True or False: A pending recession raises the default risk premium on privately issued bonds.

A pending recession raises the default risk premium on privately issued bonds because economic downturns generally lead to increased uncertainty regarding the financial stability of borrowers. As the likelihood of default rises during a recession—due to factors like declining revenues, increased unemployment, and overall economic distress—investors require a higher return to compensate for the increased risk. This demand for a higher return manifests as an increase in the default risk premium, as investors seek to mitigate the potential losses associated with defaults on these bonds. Consequently, during a period of economic downturn, the increased perception of risk leads to higher premiums on privately issued bonds, making the statement true.