Series 7 Exam Question 364: Answer and Explanation

Question: 364

Which of the following bonds most likely has the highest coupon rate?

• A. DEF Corp. mortgage bonds
• B. DEF Corp. collateral trusts
• C. DEF Corp. debentures
• D. DEF Corp. equipment trusts

Correct Answer: C

Explanation:

C. Mortgage bonds, collateral trusts, and equipment trusts are all forms of secured bonds. Because these bonds are secured with collateral, the collateral securing the bonds is sold to satisfy the bondholders if the issuer defaults. However, debentures are not backed with collateral and are, therefore, riskier. Because more risk equals more reward, debenture holders can expect a coupon rate that's higher than that of the secured bonds.