Exam 1: Modules 1 & 2 Started: Sep 20 at 8:52pm Quiz Instructions ect the best r

Question

Exam 1: Modules 1 & 2 Started: Sep 20 at 8:52pm Quiz Instructions ect the best response for each question Question 4 5 pts The yield on a 10-year US Treasury bond is 2.5%. ABC Co. and XYZ Co. each issue a 10-year bond. ABC's bond has a yield of 3.5%; while XYZs bond has a yield of 5%. Select the statement below that BEST describes this situation. The credit spread of XYZ's bond is 5% O XYZ Co. should have greater default risk than ABC Co. O The credit spread of ABC's bond is 1%; and XYZ Co. should have greater default risk than ABC Co. O XYZ Co. should have a higher credit rating than ABC Co The credit spread of ABC's bond is 1%. Next No new data to save. Last checked at 9:02pm Sub F4 FS 1n F7

Explanation / Answer

Answer: Option "b" is correct.

XYZ company has greater default risk than ABC company becasue companies with lower credit rating and high default risk, provide higher yield than the company with higher credit rating and less risk. XYZ company is providing higher yield so it has greater default risk.

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