Question

In: Finance

Which is INCORRECT regarding corporate bonds? A. Corporate bonds typically have higher yields compared to treasury...

Which is INCORRECT regarding corporate bonds?
A. Corporate bonds typically have higher yields compared to treasury bonds with the same maturity.
B. The majority of corporate bonds are callable, especially the high yield ones.
C. Corporate bonds are traded on the dealers market, and are generally less liquid than stocks.
D. The higher the credit rating, the higher the credit spread.

Solutions

Expert Solution

Credit rating indicates the degree of risk involved. The higher the credit rating, the lower the riisk and hence , the lower the risk premium (credit spread)

The following statement given is incorrect:

"The higher the credit rating, the higher the credit spread."

The answer is option D

(Treasury bonds are risk free. Corporate bonds carry risk and hence risk premium is added.Therefore, these bonds will have higher yields compared to Treasury bonds. Other statements are also correct).


Related Solutions

Why are yields on corporate bonds higher than yields on Treasury bonds? What is a credit...
Why are yields on corporate bonds higher than yields on Treasury bonds? What is a credit spread? Today, are those spreads unusually wide or unusually narrow? Why? What are junk bonds? Is it ever a good idea to invest in junk bonds? Why are yields on municipal bonds usually lower than yields on Treasury bonds of the same maturity? Are munis free of default risk? What is a credit analyst?
Which of the following is INCORRECT regarding interest rates? Bonds with greater default risk typically trade...
Which of the following is INCORRECT regarding interest rates? Bonds with greater default risk typically trade at higher yield-to-maturities. A positive term premium is caused in part by borrowers’ preference for long duration and lenders’ preference for short duration. An inverted yield curve serves as a negative indicator for the future state of the economy. Zero-coupon bonds are less sensitive to interest rate changes than coupon bonds with the same time to maturity. The yield curve typically slopes upward due...
Which of the following statements is INCORRECT regarding a corporate mission? It reflects a company's purpose....
Which of the following statements is INCORRECT regarding a corporate mission? It reflects a company's purpose. It usually includes a description of the company’s competitive advantage. It is the long-term action plan to be adopted by the company. It defines a company's reason for existence.
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____...
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. face value par value maturity coupon rate Victoria Tennis is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent...
The bond equivalent yields for U.S. Treasury and A-rated corporate bonds with maturities of 93 and 175 days are given below:
The bond equivalent yields for U.S. Treasury and A-rated corporate bonds with maturities of 93 and 175 days are given below:                                                            85 Days           190 Days                        U.S. Treasury              7.07%              7.11%                        A-rated corporate        7.42%              7.66%                        Spread                         0.35%              0.55%         a.   What are the implied forward rates for both an 105-day Treasury and an 105-day A-rated bond beginning in 85 days? Use daily compounding on a 365-day year basis.         b.   What is the implied probability of default on A-rated bonds over the next 85...
Consider the following yields to maturity on various one-year zero-coupon bonds; Treasury:4.85%, AAA corporate:5.075%, BBB corporate:5.9%,...
Consider the following yields to maturity on various one-year zero-coupon bonds; Treasury:4.85%, AAA corporate:5.075%, BBB corporate:5.9%, B corporate:6.55%. The credit spread of the B corporate bond is closest to: a. 0.225% b. 4.85% c. 1.05% d. 1.7%
Why do callable bonds typically have a higher yield to maturity than noncallable bonds, holding all...
Why do callable bonds typically have a higher yield to maturity than noncallable bonds, holding all other things constant? Is the yield differential between callable and noncallable bonds likely to be constant over time? Why? Because the dividend payments on preferred stock are not a tax-deductible expense, the explicit cost of this form of financing is high. What are some of the offsetting advantages to the issuing firm and to the investor that enable this type of security to be...
Compare and contrast a 5-year AAA corporate bond with a 5-year Treasury Note. Which would typically...
Compare and contrast a 5-year AAA corporate bond with a 5-year Treasury Note. Which would typically offer a higher interest rate? Why? What risk affects both types of bonds?
This question is related to treasury bonds’ term structure. a. “A term structure of bond yields...
This question is related to treasury bonds’ term structure. a. “A term structure of bond yields tells us how bond yields change over time.” Explain whether you agree or disagree with the statement. b. When you observe a down-sloping yield curve, what may you say about the economy under the liquidity premium theory?
Which of the following statements concerning bonds is (are) correct? :I. Municipal bonds have lower yields...
Which of the following statements concerning bonds is (are) correct? :I. Municipal bonds have lower yields than Treasury bonds. :II. Low coupon bonds have higher yields than high coupon bonds. :III. General obligation bonds yield more than revenue bonds. :IV. Initially, callable bonds have higher yields than noncallable bonds. a. I and III only b. I and IV only c. I, III and IV only d. II and IV only
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT