Firms A and B both issued 20-year bonds on the same date that have identical features except for the coupon rates. However, Firm A bonds have a coupon rate of 5% and Firm B bonds have a coupon rate of 7%. This difference is due to:

Question

Johnathan Randall

Business

16 April, 02:37

Firms A and B both issued 20-year bonds on the same date that have identical features except for the coupon rates. However, Firm A bonds have a coupon rate of 5% and Firm B bonds have a coupon rate of 7%. This difference is due to:

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Answers (1)

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Jair Chan · Answer 1

Firm B having a higher probability of default.

Explanation:

The probability of default is an approximation of how prospective it looks that the mortgagor will not be able to safeguard the reimbursement responsibilities on the obligation or the finance. And if that mortgagor can be painstaking to keep up with a high likelihood of avoidance, and then the moneylenders can likely charge quite higher interest charges.