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Time lines can be constructed to deal with situations where some of the
cash flows occur annually but others occur quarterly.
Time lines can only be constructed for annuities where the payments
occur at the end of the periods, i.e., for ordinary annuities.
Time lines cannot be constructed where some of the payments
constitute an annuity but others are unequal and thus are not part of the
annuity.
20. Which of the following statements is CORRECT?
All else equal, senior debt generally has a lower yield to maturity than
subordinated debt.
An indenture is a bond that is less risky than a mortgage bond.
The expected return on a corporate bond will generally exceed the
bond's yield to maturity.
If a bond’s coupon rate exceeds its yield to maturity, then its expected
return to investors exceeds the yield to maturity.
Under our bankruptcy laws, any firm that is in financial distress will be
forced to declare bankruptcy and then be liquidated.
21. A 15-year bond with a face value of $1,000 currently sells for $850.
Which of the following statements is CORRECT?
1. The bond's yield to maturity is greater than its coupon rate.
2. If the yield to maturity stays constant until the bond matures, the
bond's price will remain at $850.