Answer (A) is correct . The general principle is that risk and return are directly correlated. U.S.?Treasury securities are backed by the full faith and credit of the federal government and are therefore the least risky form of investment. However, their return is correspondingly lower. Corporate first mortgage bonds are less risky than income bonds or stock because they are secured by specific property. In the event of default, the bondholders can have the property sold to satisfy their claims. Holders of first mortgages have rights paramount to those of any other parties, such as holders of second mortgages. Income bonds pay interest only in the event the corporation earns income. Thus, holders of income bonds have less risk than shareholders because meeting the condition makes payment of interest mandatory. Preferred shareholders receive dividends only if they are declared, and the directors usually have complete discretion in this matter. Also, shareholders have claims junior to those of debtholders if the enterprise is liquidated.
Answer (B) is incorrect because The proper listing is mortgage bonds, subordinated debentures, income bonds, and preferred stock. Debentures are unsecured debt instruments. Their holders have enforceable claims against the issuer even if no income is earned or dividends declared.
Answer (C) is incorrect because The proper listing is first mortgage bonds, second mortgage bonds, income bonds, and common stock. The second mortgage bonds are secured, albeit junior, claims.
Answer (D) is incorrect because The proper listing is mortgage bonds, debentures, preferred stock, and common stock. Holders of common stock cannot receive dividends unless the holders of preferred stock receive the stipulated periodic percentage return, in addition to any averages if the preferred stock is cumulative.
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