Which of the following statements is most correct?
A) The expected return on corporate bonds will generally exceed the yield to maturity.
B) If a company increases its debt ratio, this is likely to reduce the default premium on its existing bonds.
C) All else equal, senior debt will generally have a lower yield to maturity than subordinated debt.
D) Answers a and c are correct.
E) None of the answers above is correct.

Question

Quizplus · Accepted Answer

This statement is generally true as senior debt is considered less risky than subordinated debt, and thus investors are willing to accept a lower yield on senior debt. Additionally, answer choice B is incorrect as an increase in a company's debt ratio would generally increase the default premium on its existing bonds. Answer choice A is also incorrect as the expected return on corporate bonds would most likely be very similar to the yield to maturity. Therefore, only answer choice C is the most correct.

Which of the Following Statements Is Most Correct