- CFA Exams
- CFA Level I Exam
- Topic 6. Fixed Income
- Learning Module 16. Credit Analysis for Corporate Issuers
- Subject 3. Seniority Rankings, Recovery Rates, and Credit Ratings
CFA Practice Question
Market participants will generally have the highest required return for the following bonds:
B. Collateral trust bonds
C. Subordinated debentures
D. Debentures
A. Mortgage bonds
B. Collateral trust bonds
C. Subordinated debentures
D. Debentures
Correct Answer: C
User Contributed Comments 8
| User | Comment |
|---|---|
| danlan | What are subordinated? |
| wroger | subordinate debentures = junior debentures. |
| Done | more risk = more return. They are unsecured as well |
| cong | subordinate means lower seniority. |
| endurance | thanks cong |
| davcer | senior AAA, subordinated AA, A, BBBB |
| adidasler | just think of junk bonds |
| ascruggs92 | Lol first off, Danlan, read the notes. Second, davcer & adidasler, bond ratings are influenced by seniority but do not depend on seniority, meaning a subordinate bond is less likely to have an AAA rating but it is not unheard of. Since "junk bonds" just refers to debt with very low ratings, the same concept applies. Think about it, if you bought the least senior AAPL bonds that are offered, even if they had ten traunches (levels of seniority), the bonds would still be considered investment grade bonds and would have an AAA rating. Junk bonds can be un-subordinated and still be junk because the company has a bad credit rating. |