The TrunkLine Company Debtholders Are Promised Payments of $35 If

question 4

Multiple Choice

The TrunkLine Company debtholders are promised payments of $35 if the firm does well, but will receive only $20 if the firm does poorly. If the bonds are selling at a price of $25, the promised return to the bondholders is approximately:

• A) 2.9%.
• B) 40%.
• C) 27.3%.
• D) 16.86%.
• E) 100%.

---

Definitions:

Potential Output

Potential Output refers to the highest level of goods and services an economy can produce sustainably, without triggering inflation.

Government Securities

Government-issued securities designed to fund government spending while providing investors with a profit.

Discount Rate

The interest rate charged by central banks on loans they provide to commercial banks, influencing monetary policy and the money supply.

Required Reserve Ratio

The required reserve ratio is the portion of depositors' balances that banks must have on hand as cash, set by central banking authorities to ensure liquidity.