Which of the following terms describes bonds that are subject to default risk?

The correct answer is speculative bonds. Speculative bonds are those that possess a higher risk of default, meaning the issuer may not be able to meet its principal and interest payments. These bonds typically have lower credit ratings, which reflect their higher risk profile. Investors tend to seek higher yield from these bonds in compensation for the increased risk they are taking on.

In contrast, investment-grade bonds generally have stronger credit ratings and are considered to have a lower likelihood of default, making them a more secure choice for conservative investors. Government bonds, which are issued by national governments, are often viewed as low-risk because they typically have the backing of the government's financial resources, and thus carry little to no default risk. Municipal bonds are issued by local or state governments and often have some level of risk, but they are generally safer than speculative bonds, especially if they are backed by tax revenues or other secure income sources.

By understanding these distinctions, you can see how speculative bonds stand out as the category that explicitly indicates a risk of default.