Investors who purchase subordinated debentures usually enjoy higher interest rates than other bondholders because of the increased risk associated with this type of bond.

Question

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Subordinated debentures are a type of bond that ranks lower in priority compared to other types of bonds such as senior debentures. This means that in case of default or bankruptcy, subordinated debenture holders will be paid after other bondholders have been fully paid. Therefore, subordinated debenture holders are exposed to higher risk, which is reflected in the higher interest rates offered to them.

Investors Who Purchase Subordinated Debentures Usually Enjoy Higher Interest Rates