Question

Which of the following features, everything else the same, give bonds higher yields?

Select all those that apply

Question 8 options:

	A. The bond is a senior bond
	B. the bond is a junior bond
	C. The bond is callable
	D. The bond is convertible
	E. The bond is putable

Answer 1

Bonds which are junior in nature, thereby coming in priority after senior bonds, senior secured debts and senior unsecured debts in case of a firm's liquidation have higher yields than normal so as to compensate bondholders for the undertaking the higher risk of not being paid in case the company goes into liquidation and its liquidation value is just enough to cover only senior secured debt tranches such as the ones mentioned above.

A callable bond also offers higher yields as bondholders bear the risk of bonds being called early in case of an interest rate downturn, thereby forcing them (the bondholders) to forego rising bond price benefits and investing bond proceeds at the now existing lower interest rates. This implies that such investors also need to be compensated with a higher yield.

Hence, the correct options are (B) and (C).