Question

Having a problem with a firm having 2 bonds outstanding: One is a subordinated debenture, the other bond is convertible. Both bonds mature in 10 years and have the same coupon payment. Which bond will have the higher/lower yield-to-maturity, or will the two bonds have the same YTM (because they are issued by the same firm)?   

Answer 1

Subordinated debenture is a security which is ranked lower in terms of claiming the assets as compared to other securities. If there is a case of default, then it will be only paid once all the senior debt holders are paid in full.

So Clearly this is very risky to hold subordinate debt and there is lot of risk involved. So to compensate that, investor will require higher yield.

On the other hand, convertible bond have the option to convert that bond into ordinary shares, so they do not carry much risk, instead they have an option of coversion.So it will be less risky.

So clearly, out of subordinate debenture and convertible bonds, subordinate debenture's YTM will be higher keeping every other thing constant