Types of corporate bonds

This is the type of question I would expect to see on the Series 6, 7, and 65 exams. Notice how it makes you think as opposed to asking you to recall memorization points.

The XTZ Corporation will issue three series of bonds. Each offer is of the same size and term to maturity. XTZ will issue secured bonds, a series of debentures, and a series of subordinated debentures. Therefore,
A. The subordinated debentures would offer the lowest yield to investors
B. The secured bonds would offer the lowest yield to investors
C. XTZ is reducing the leverage component of its capital structure
D. The debentures would offer the lowest yield to investors

EXPLANATION: when bond investors take on more risk, they demand a higher yield. The secured bonds, backed by collateral, are the safest in terms of default risk, so they would offer the lowest yield here. Subordinated debentures put the investors at the bottom of the pecking order in bankruptcy and, therefore, have to offer a higher yield. Whenever a company issues bonds, they are using and, therefore, increasing leverage. The other way to capitalize is to sell ownership positions called "equity securities," which include common and preferred stock. Notice how analytical one needs to be to get the difficult exam questions right.

ANSWER: B