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) An indenture is a bond that is less risky than a subordinated debenture.
D) Statements a and c are correct.
E) All of the answers above are correct.

Question

Quizplus · Accepted Answer

Senior debt typically has priority over subordinated debt in the event of default, making it less risky and therefore typically carrying a lower interest rate. Statement A is incorrect as an increase in debt ratio typically indicates higher default risk and may result in an increase in the default premium on existing bonds. Statement C is also incorrect as an indenture is a legal document that outlines the terms and conditions of a bond, but it does not inherently determine the level of risk associated with the bond.

Which of the Following Statements Is Most Correct