Question

Identify the type of bond based on each description given below:

a. These bonds are collateralized securities with first claims in the event of bankruptcy.
b. These bonds are not backed by any physical collateral.
c. They are backed by the reputation and creditworthiness of the issuing company.
d. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates.

Answer 1

a. These bonds are collateralized securities with first claims in the event of bankruptcy. SENIOR MORTGAGE BONDS.

A senior mortgage bond is one whose collateral is one or more properties. Mortgage bonds generally have priority over other types of bonds and a senior mortgage bond has priority over other mortgage bonds.

b. These bonds are not backed by any physical collateral. They are backed by the reputation and creditworthiness of the issuing company. DEBENTURES

Debentures have no physical collateral backing them and are only back by the reputation of the company. This therefore makes them a bit high risk and so their rates are higher.

d. These bonds are considered the riskiest of all corporate bonds and thus offer the highest interest rates. SUBORDINATED DEBENTURES.

Debentures have higher than normal rates so subordinated debentures will be quite risky. They command the highest rates as a result because in the event of a default, their claim on assets is last.