Which One of the Following Statements Concerning Bankruptcy Is Correct

question 13

Multiple Choice

Which one of the following statements concerning bankruptcy is correct?

• A)Bondholders have a greater incentive than stockholders to keep a firm from filing for bankruptcy.
• B)An indirect cost of bankruptcy is the loss of key employees.
• C)Bankruptcy is sometimes used as a means to increase payroll costs.
• D)The assets of a firm tend to increase in value when a firm is in financial distress.
• E)The administrative costs incurred in a bankruptcy are considered indirect bankruptcy costs.

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Definitions:

Reinvestment Rate Risk

Occurs when a short-term debt security must be “rolled over.” If interest rates have fallen, the reinvestment of principal will be at a lower rate, with correspondingly lower interest payments and ending value.

High-Coupon Bonds

Bonds that offer a higher-than-average interest rate (coupon) compared to others in the market, reflecting potentially higher risk.

Low-Coupon Bonds

Low-Coupon Bonds are bonds that have a lower interest rate than the prevailing market interest rate, typically making them sell at a discount to their face value.

Yield To Maturity

The total return anticipated on a bond if the bond is held until the end of its lifetime.