Two corporations (TruBlu and FlyByNight) issue perpetuities that both pay $1,000 per year, but the market price of the FlyByNight bonds are much lower. The difference in the bond prices may reflect the belief that the bonds issued by FlyByNight are ________ risky when compared to the TruBlu bonds.

Question

Quizplus · Accepted Answer

The lower market price of FlyByNight bonds suggests that investors perceive them to be more risky than TruBlu bonds, which have a higher market price despite the same coupon payment. This is because the market price of a bond reflects the discount rate applied to its future cash flows, and higher risk investments require a higher discount rate to compensate for the increased likelihood of default or other financial distress.

Two Corporations (TruBlu and FlyByNight) Issue Perpetuities That Both Pay