Which of the following statements is most correct?
A) The expected return on a corporate bond is always less than its promised return when the probability of default is greater than zero.
B) All else equal, secured debt is considered to be less risky than unsecured debt.
C) An indenture is a bond that is less risky than a subordinated debenture.
D) Both a and b are correct.
E) All of the answers above are correct.

Question

Quizplus · Accepted Answer

A) This statement is true because if there is a probability of default, the expected return will be lower than the promised return as investors demand compensation for the risk of default.
B) This statement is true because secured debt is backed by collateral, which reduces the risk of default compared to unsecured debt.
C) This statement is false because a subordinated debenture is a bond that is higher in risk and priority than an indenture. 
Therefore, only choices A and B are correct, making D the best answer.

Which of the Following Statements Is Most Correct