25. Types of debt Answer: e Diff: E
Statement e is correct; the others are false. Junk bonds have a higher yield to maturity relative to investment grade bonds. A debenture is an unsecured bond, while subordinated debt has greater default risk than senior debt.
26. Bond yield Answer: b Diff: M
27 . Bond yield Answer: c Diff: M
Statement c is correct; the other statements are false. By definition, if a coupon bond is selling at par its current yield will equal its yield to maturity. If we let Bond A be a 5-year, 12% coupon bond that sells at par, its current yield equals its YTM which equals 12%. If we let Bond B be a 5-year, 10% coupon bond (in a 12% interest rate environment) the bond will sell for $927.90. Its current yield equals 10.78% ($100/$927.90), but its yield to maturity equals 12%. The YTC is a better measure of return than the YTM if the bond is selling at a premium.
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