Question

Why do bonds with lower seniority have higher yields than equivalent bonds with higher​ seniority?

(Select all that Apply)

A. Debentures and notes are unsecured. Because more than one debenture might be​ outstanding, the​ bondholders' priority in claiming assets in the event of​ default, known as the​ bond's seniority is important.

B. Most debenture issues contain clauses restricting the company from issuing new debt with equal or higher priority than existing debt.

C. Because holders of higher seniority debt are likely to receive less in the event of​ default, the yield on the higher seniority debt is higher than that of less senior equivalent debt.

D. When a firm conducts a subsequent debenture issue that has a lower priority than its outstanding​ debt, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.

E. Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.

F. Because holders of lower seniority debt are likely to receive less in the event of​ default, the yield on the lower seniority debt is higher than that of more senior equivalent debt.

Answer 1

A. Debentures and notes are unsecured. Because more than one debenture might be​ outstanding, the​ bondholders' priority in claiming assets in the event of​ default, known as the​ bond's seniority is important.

B. Most debenture issues contain clauses restricting the company from issuing new debt with equal or higher priority than existing debt.

D. When a firm conducts a subsequent debenture issue that has a lower priority than its outstanding​ debt, the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.

F. Because holders of lower seniority debt are likely to receive less in the event of​ default, the yield on the lower seniority debt is higher than that of more senior equivalent debt.