Assume That a Company Issues a U

Multiple Choice

Assume that a company issues a U.S. dollar floating-rate bond with a maturity of 10 years, an interest rate of LIBOR + 2 percent, and a six-month reset period. The bond is issued at par. Which of the following statements is incorrect?

A) The default risk premium on the bond is equal to 2 percent and is constant over the life of the bond.
B) The market value of the bond must be equal to the par value on the day the interest rate is reset because the new value of LIBOR is the market's required return.
C) One cannot calculate the yield to maturity before the bond matures because the future value of LIBOR is not known for sure.
D) This bond is financially equivalent to 20 bonds of six months maturity issued sequentially with a guaranteed rollover at a fixed risk premium.
E) All of the statements above are correct.