Question

Assume the securities are all issued by the same firm. From the investor's standpoint, rank the following securities in order of increasing risk (the number of the least risky security is placed first, or to the left, in the answer set).
(1) Preferred stock.
(2) Income bonds.
(3) Convertible preferred stock.
(4) Mortgage bonds.

a. 1, 2, 3, 4
b. 4, 1, 2, 3
c. 4, 1, 3, 2
d. 4, 2, 1, 3
e. 4, 2, 3, 1

Answer 1

Answer:

D) 4, 2, 1, 3

Explanation:

The investments are listed from least risk to highest risk:

1. Mortgage bonds: bonds that are backed up or secured by a pool of mortgages.
2. Income bonds: the bond issuer only has the obligation to pay the face value of the bond, coupons are only paid if the company has certain income levels
3. Preferred stock: bond that guarantees a fixed dividend, and has priority over common bonds in case the company is liquidated
4. Convertible preferred stock: same as preferred stock only that they can be converted into common stock