If a bond rating company rates a company's first mortgage bonds higher than the same company's junior subordinated bonds, that bond rating company is following:
A) credit watch
B) the hierarchy principle
C) a stable rating philosophy
D) a standard financial analysis
E) a conservative rating philosophy

Question

Quizplus · Accepted Answer

The hierarchy principle is followed because bond ratings are based on the priority of claims in the event of a liquidation or bankruptcy. First mortgage bonds have a higher claim on assets than junior subordinated bonds, hence a higher rating reflects this hierarchy.

If a Bond Rating Company Rates a Company's First Mortgage