Types of debt Answer: e Diff: E
25. Which of the following statements is most correct?
a. Junk bonds typically have a lower yield to maturity relative to investment grade bonds.
b. A debenture is a secured bond that is backed by some or all of the firm’s fixed assets.
c. Subordinated debt has less default risk than senior debt.
d. All of the statements above are correct.
None of the statements above is correct.
Medium:
Bond yield Answer: b Diff: M
26. Which of the following statements is most correct?
a. Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity, which is based on market prices.
b. The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield.
c. On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
d. The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm enters bankruptcy.
e. None of the statements above is correct.
Bond yield Answer: c Diff: M
27. Which of the following statements is most correct?
a. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.
b. If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
c. If a coupon bond is selling at par, its current yield equals its yield to maturity.
d. Statements a and b are correct.
e. Statements b and c are correct.
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