Question

Which of the following statement is incorrect?

a. Preferred stock is also like equity because it has an infinite maturity and a lower-priority claim against the firm than bondholders have.

b. Staggered maturities bonds are packaged as a series of different bonds with different or staggered maturities and thus every few years a portion of the bond issue matures and is paid off.

c. A convertible bond is a bond that may be converted, at the option of the bond’s owner, into a certain amount of another security, such as common stocks, issued by the same company.

d. Junk bonds are usually not trash and they are simply better than the investment grade bonds with the highest bond ratings.

e. Most of the answers are correct.

Answer 1

A Junk Bond is a debt instrument with a credit rating below BBB- rating. The probability of default on these type of bond is very high. since the level of risk on investment in junk bond is high that is required return is also high.

A bond with credit rating above BBB+ is considered as investment grade bond. A bond with AAA rating is considered as best and safe bond investment. The default risk on these bond is low and so required rate of return is also low.

So junk bond are not better than investment grade bond.

Option (D) is incorrect.