Question

Which type of bond - a mortgage bond, a debenture, or a subordinated debenture - generally has the

a. Highest cost to the bond issuer?

b. Least risk to the bond holder?

c. Highest yield to the bond holder?

Answer 1

a.

Question : Highest Cost to bond issuer

Answer : Subordinated Debenture

b.

Question: Least risk to bond Holder

Answer: Mortgage bond

c.

Question : Highest yield to the bond holder

Answer : Subordinated Debenture

Explanation :

Mortgage bonds are secured with a collateral and carry less risk whereas debentures are unsecured loans and carry more risk. Because debenture are more risky the issuer should pay higher interest to compensate for the risk.

Subordinated debenture are subordinate to main debentures and in case if insolvency main debentures are paid first therefore subordinate debentures carry more risk than main debentures. For same reason of higher risk, the issuer should pay higher interest for subordinated debentures than debentures to compensate for more risk.

Therefore Subordinated debentures costs the highest to bond issuer and has highest yield to bond holder.

And Mortgage bonds are least risky for bond holder.