Which of the following statements is CORRECT?
A) An indenture is a bond that is less risky than a mortgage bond.
B) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
E) All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

Question

Quizplus · Accepted Answer

Senior debt has a higher claim on assets and earnings than subordinated debt, which makes it less risky. Therefore, investors accept a lower yield to maturity on senior debt compared to subordinated debt.

Which of the Following Statements Is CORRECT