Certified Management Accountant Practice Exam 2025 – The Comprehensive All-in-One Guide to Exam Success!

Subordinated debentures typically offer the highest rate of return compared to the other debt instruments listed. This is primarily because subordinated debentures are lower in the capital structure hierarchy, meaning they are repaid after other forms of debt, like first mortgage bonds or senior debentures, in the event of liquidation.

Investors demand a higher interest rate for subordinated debentures to compensate for the increased risk associated with their lower priority in claims. If a company faces financial difficulty, there is a greater chance that holders of subordinated debentures may not receive full payment, or may not receive payment at all. This elevated risk drives up the expected return, thus enabling these instruments to provide higher yields than other, less risky options like first mortgage bonds or preferred stock.

Preferred stock, while having fixed dividend payments, does not have the same risk profile as subordinated debentures, as it typically ranks above debt in the capital structure, and may not offer the same potential returns. First mortgage bonds, being secured by a lien on property, tend to be among the safer investments and, therefore, usually provide lower returns. Present value instruments refer to various financial products evaluated on the basis of their present value calculations rather than a specific