Global inc, has issued 2 classes of debt securities to finance it’s operations, a first mortgage bond and debenture bonds. All else equal, will the default and recovery rates of the debentures likely be higher than the first mortgage bond? Default rate?/Recovery rate? A. No/No B. No/Yes C. Yes/No D. Yes/Yes
Default rates don’t discriminate, it’ll be the same across the board for a company. However your chances of recovering a debenture are much less than a mortgage bond in the case of default. B) Debentures are subordinated debt not backed by any collateral, just the faith of the corp
u are correct. I’m an idiot and didn’t realize it was being issued by the same firm
so shouldn’t it be A?
Recovery rate would be greater for the mortgage because it is backed by collateral. The debenture is unsecured.
And debentures are known as subordinated debt, meaning if you invest in a corporations debentures they are usually very last in line when it comes to recovering your investment
So imo should be A.