Question

Typically, the yield to maturity on corporate bonds will be ___________ the more restrictions are placed...

Typically, the yield to maturity on corporate bonds will be ___________ the more restrictions are placed on management through restrictive covenants, because ____________.

a. higher; corporate earnings will be lower when a bond has restrictive covenants

b. higher; the bond’s will be considered safer by investors

c. lower; the bonds will be considered safer by investors

d. lower; corporate earnings will be higher when a bond has restrictive covenants

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Answer #1

Option C - Yield on the bond will be lower as restrictive covenants on the management reduce risk as management cannot take arbitrary decisions which might jeopardise the company's performance.

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