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

Question

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Subordinated debentures are lower in priority than second mortgage bonds in the event of bankruptcy, which increases the risk for investors. To compensate for this increased risk, the firm will typically have to offer a higher coupon rate on its subordinated debentures compared to its second mortgage bonds.

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