Corporate bonds and default risk Answer: c Diff: M
51. Which of the following statements is most correct?
a. The expected return on corporate bonds will generally exceed the yield to maturity.
b. Firms that are in financial distress are forced to declare bankruptcy.
c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt.
d. Statements a and c are correct.
e. None of the statements above is correct.
Default risk and bankruptcy Answer: b Diff: M
52. Which of the following statements is incorrect?
a. Firms will often voluntarily enter bankruptcy before they are forced into bankruptcy by their creditors.
b. An indenture is a bond that is less risky than a subordinated debenture.
c. When a firm files for Chapter 11 bankruptcy, it may attempt to restructure its existing debt by changing (subject to creditor approval) the interest payments, maturity, and/or principal amount.
d. All else equal, mortgage bonds are less risky than debentures because mortgage bonds provide investors with a lien (that is, a claim) against specific property.
e. A company’s bond rating is affected by financial performance and provisions in the bond contract.
Default risk and bankruptcy Answer: b Diff: M
53. Which of the following statements is most correct?
a. If a company increases its debt ratio, this is likely to reduce the default premium on its existing bonds.
b. All else equal, senior debt has less default risk than subordinated debt.
c. When companies enter Chapter 11, their assets are immediately liquidated and the firm no longer continues to operate.
d. Statements a and c are correct.
e. All of the statements above are correct.
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