As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured. True False

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Business

Hezekiah Paul

17 May, 13:54

As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured. True False

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Douglas Mcmahon · Answer 1

True

Explanation:

It is because the investor will require returns that compensate for the level of risk that is associated with the investment. From the investor's perspective, the required returns must be lower on less riskier bonds (backed by assets) and higher returns are required on highly risky investments. As debentures are not backed by assets, this means they are highly riskier than bonds that are backed by specific assets. So the required return on debentures would be higher.