Question

Which of the following statements is CORRECT?

a.	Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
b.	Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
c.	A company's subordinated debt has less default risk than its senior debt.
d.	A debenture is a secured bond that is backed by some or all of the firm's fixed assets.
e.	Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.

Answer 1

Junk bonds are the bonds which are more riskier because the corporation issuing it is struggling financially and has a higher risk of defaulting that is not paying interest or/and the principal amount to the investor. Because of the high risk associated with it, higher rate of interest is paid to compensate it. Therefore it is also called high-yield bonds.

Senior debt is secured by collateral and gets priority over repayment which reduces default risk while the junior debt is unsecured due to which payment is made to them after making payment to senior debt therefore chances of default is high.

A debenture can be both secured and unsecured. Secured debentures are those debentures that are are secured by the assets of the the company where as an secured debentures are those debentures that are not secured by the assets of the company therefore there is chances of default in it.

Convertible bonds are those bonds that are likely to be converted into stock in future at the discretion of the bond holder if the stock performs well. Interest on these bonds are lower than non convertible bonds because the growth associated with converting these bonds into stock is more. If these convertible bonds are converted into stock and the prices of the stock rises, the investor gets capital gains. This is the reason the companies provide less interest on convertible bonds.

Keeping all the above things in mind we can conclude that point (e) in the given question is correct.