Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Question

Quizplus · Accepted Answer

This is because subordinated debentures are lower in the hierarchy of claims in case of bankruptcy or liquidation compared to second mortgage bonds. Therefore, they are riskier and investors demand a higher coupon rate to compensate for the additional risk.

Other Things Equal, a Firm Will Have to Pay a Higher