Suppose That the Possibility of Default on a Firm's Bond

question 39

True/False

Suppose that the possibility of default on a firm's bond is totally unrelated to other events in the economy. In this case, the beta of the bond will equal zero and the discount rate will equal the risk-free rate.

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Definitions:

Current Liability

A current liability is a financial obligation that is due to be settled within one year or within the normal operating cycle of the business, whichever is longer.

FICA Taxes

Taxes mandated by the Federal Insurance Contributions Act, which fund Social Security and Medicare, collected from both employers and employees.

FUTA Taxes

Federal Unemployment Tax Act taxes, which are payroll taxes paid by employers to fund the government’s unemployment benefits.

SUTA Taxes

State Unemployment Tax Act taxes, which are state unemployment insurance contributions that employers must pay to provide unemployment benefits to workers who have been laid off.