Question

A bondʹs promised rate of return will be: a - greater than or equal to its...

A bondʹs promised rate of return will be:

a - greater than or equal to its expected rate of return

b - less than its expected rate of return, but greater than the expected return on equity

c - less than or equal to its expected rate of return, but greater than the expected return on equity        

d - greater than or equal to the firmʹs overall weighted average cost of capital

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Answer #1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS OPTION A : greater than or equal to its expected rate of return

A bond's promised rate of return can not exceed the rate of return on equity in any case (if the firm is rational), as the equity involves way more credit risk than the bonds. Also, bonds are cosidered to be the cheapest source of funding as there is a least amunt of risk. Hence, the bond's promised rate can not exceed or equalise firm's WACC and firm's cost of equity.

Hence, options b, c and d lapses.

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.

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