If a firm could sell a mortgage bond at an 8% interest rate, it could sell an otherwise identical debenture at
A)a rate less than 8%
B)8%
C)a rate greater than 8%
D)cannot be determined

Question

Quizplus · Accepted Answer

A mortgage bond is secured by a mortgage on specific property, which makes it less risky for investors compared to a debenture. Since the debenture is unsecured, it is riskier for investors and will typically have a higher interest rate to compensate for this risk. Therefore, the debenture would need to be sold at a rate greater than 8% to attract investors.

If a Firm Could Sell a Mortgage Bond at an 8