Which of the following statements is CORRECT?
A)Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
B)Subordinated debt has less default risk than senior debt.
C)Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
D)Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
E)A debenture is a secured bond that is backed by some or all of the firm's fixed assets.

Question

Quizplus · Accepted Answer

Convertible bonds typically have lower coupon rates than non-convertible bonds because the possibility of capital gains from converting the bond into stock offsets the lower immediate return from the coupon. Junior debt (choice A) is debt that is subordinate to senior debt and is therefore paid off after the senior debt in bankruptcy. Subordinated debt (choice B) has higher default risk than senior debt because it is lower in priority of repayment. Junk bonds (choice D) typically provide a higher yield to maturity than investment-grade bonds because they have a higher default risk. A debenture (choice E) is an unsecured bond that is not backed by any collateral.

Which of the Following Statements Is CORRECT