Question

Which of the following statements is CORRECT?

a.All else equal, secured debt is more risky than unsecured debt.

b.The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.

c.All else equal, senior debt has more default risk than subordinated debt.

d.Under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.

Answer 1

The correct statement is that under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated and the sale proceeds used to pay off claims according to priority. Therefore, the correct option is D.

Step-by-step explanation:

The correct statement among the options is: d. Under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act. This statement is correct because under Chapter 7 bankruptcy, the assets of a firm that declares bankruptcy are sold off to pay off their debts. The claims against the firm are paid according to the priority of the claims as specified in the Bankruptcy Act.