Which of the following statement is true? • Corporate bond yields are generally lower than government bond yields for bonds having the same coupon rate and maturity. • The spread of junk bond yields over that of Australian Government Bond is generally lower than the spread of investment-grade bonds over that of the Australian Government Bond. Once a bond defaults, bondholders can no longer receive any residual payment from the bond. • Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The bond with a lower coupon rate carries greater risks.
Question
Which of the following statement is true? • Corporate bond yields are generally lower than government bond yields for bonds having the same coupon rate and maturity. • The spread of junk bond yields over that of Australian Government Bond is generally lower than the spread of investment-grade bonds over that of the Australian Government Bond. Once a bond defaults, bondholders can no longer receive any residual payment from the bond. • Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The bond with a lower coupon rate carries greater risks.
Solution
The third statement is true: "Once a bond defaults, bondholders can no longer receive any residual payment from the bond." When a bond defaults, it means the issuer is unable to make the promised interest or principal payments to the bondholders. As a result, bondholders may not receive any further payments.
The first statement is generally false. Government bonds are usually considered safer than corporate bonds, so they tend to have lower yields.
The second statement is also generally false. Junk bonds are riskier than investment-grade bonds, so the spread over government bonds is usually higher, not lower.
The fourth statement is not necessarily true. Two bonds with the same maturity, risk rating, and face value but different coupon rates do not necessarily mean the one with a lower coupon rate carries greater risks. The risk depends on various factors, including the issuer's creditworthiness.
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