From the perspective of the investor/lender, rank the risk of the following securities from lowest to highest.
I.Long-term unsecured debt
II.Convertible preferred shares
III.Common equity
IV.Bank loans
A)I, II, III, IV
B)IV, III, II, I
C)I, II, IV, III
D)IV, I, II, III

Question

Quizplus · Accepted Answer

Bank loans are typically secured, making them lowest risk for the investor/lender. Long-term unsecured debt is next in line, as it still has a contractual obligation to repay but lacks collateral. Convertible preferred shares have some downside protection due to the ability to convert to common equity, but still have higher risk than debt. Common equity has the highest risk due to being subordinate to debt and lacking a contractual obligation to pay dividends or repay principal.

From the Perspective of the Investor/lender, Rank the Risk of the Following