Question

Can someone please help me? Why are subordinate bonds and preferred stock more risky than long-term senior bonds?

Answer 1

Answer:

Subordinated bonds, also known as subordinated debts, is an unsecured loan or bond that ranks below other, more senior loans or securities with the respect to claims on assets or earnings. Generally, subordinated bonds are debts that can be added to preferred stocks. Preferred stocks can be viewed as long- term investments, but are generally more risky because they are more sensitive to interest- rate risk if the rates rise. If they rise, then the price of the preferred stocks may fall and can fall lower than the price of short- term bonds. The difference between subordinated bonds and senior bonds is the priority in which the debt claims are paid. If one has to file bankruptcy or face liquidation, senior debts is paid back before the subordinate debt. Once the senior debt is completely paid back, then the subordinate debt starts being repaid.

Explanation:

Answer 2

Answer:

This is because subordinated debts are only repayable after the other debts have been paid off. theses are the more risky ones for the lender of the money. Subordinated loans usually have a lower credit rating. Therefore, a higher yield than senior debt.