Which of the following statements is CORRECT? (Points: 4)

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

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Subordinated debt has less default risk than senior debt

Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first

To determine which statement is correct, let's analyze each statement individually:

1. "Junk bonds typically provide a lower yield to maturity than investment-grade bonds."
To verify this statement, you would need to compare the historical yields to maturity of junk bonds with investment-grade bonds. You can do this by retrieving historical data on yields for both types of bonds and calculating the average yields to maturity. By comparing these averages, you can determine whether junk bonds typically provide a lower yield to maturity than investment-grade bonds.

2. "A debenture is a secured bond that is backed by some or all of the firm's fixed assets."
To confirm this statement, you need to review the definition and characteristics of debentures. A debenture is a type of bond that is not backed by specific collateral but relies on the issuer's general credit and reputation. If a debenture is backed by some or all of the firm's fixed assets, it would contradict the typical nature of a debenture. You could consult reliable sources, such as finance textbooks or reputable websites, to check the definition and characteristics of debentures.

3. "Subordinated debt has less default risk than senior debt."
To determine the accuracy of this statement, you will need to analyze the default risk associated with subordinated debt and senior debt. Default risk refers to the likelihood that the issuer will not be able to fulfill its debt obligations. You can compare historical default rates or credit ratings for both types of debt to determine which one typically carries less default risk.

4. "Junior debt is debt that has been more recently issued, and in bankruptcy, it is paid off after senior debt because the senior debt was issued first."
To establish if this statement is true, you would need to understand the priority of debt repayment in bankruptcy. Junior debt refers to debt that ranks below senior debt in terms of repayment priority. By researching bankruptcy laws or consulting legal and finance resources, you can find information on the order of debt repayment in bankruptcy proceedings.

5. "Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains."
To verify this statement, you would need to compare the coupon rates of convertible bonds with non-convertible bonds of similar default risk. Convertible bonds can be exchanged for a predetermined number of common shares, whereas non-convertible bonds cannot. By analyzing historical data on coupon rates for both types of bonds, you can determine if convertible bonds typically have lower coupon rates.

By following this process of researching and evaluating information, you can determine which statement is correct. Remember to consult reputable sources and consider various factors before arriving at a conclusion.