Which of the following bonds offer the investor the most protection?
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A. B. C. D.A
The bond that offers the investor the most protection is usually the first-mortgage bond (option A).
First-mortgage bonds are secured by a specific property or asset and are considered safer than unsecured bonds because the issuer has pledged collateral to protect the investor's interest. In case of default, the bondholder has a priority claim on the pledged property or asset. This means that if the issuer goes bankrupt or fails to pay the bond's interest and principal, the bondholder can seize the collateral and sell it to recover their investment.
Debentures (option B) are unsecured bonds, meaning they are not backed by any specific asset. Instead, they rely on the issuer's creditworthiness and ability to generate cash flows to pay interest and principal. Since there is no collateral to protect the bondholder's interest, debentures are considered riskier than first-mortgage bonds.
Subordinated debentures (option C) are similar to regular debentures, but they have a lower priority claim on the issuer's assets than other creditors in case of default. This means that subordinated debenture holders would be paid after other creditors, including holders of first-mortgage bonds.
Income bonds (option D) are a type of bond that pays interest only if the issuer generates enough income to cover the interest payment. If the issuer fails to generate enough income, the interest payment may be deferred or suspended. Therefore, income bonds are considered riskier than bonds that have a fixed interest payment.
In summary, among the given options, first-mortgage bonds (option A) offer the most protection to the investor due to their secured nature.