Question

Place the following list in order of least to most risky. After each, define the security, identify risk characteristics and suggest and appropriate commercial use for both the seller and buyer

commercial paper

common stock

corporate bond

junk bond

mortgage bond

preferred stock

t bill

t note

Answer 1

For the following investment asset class , the following are the risk profile from High to Low

The top of the table is High Risk and the bottom denotes low risk

No	Risk	Type	Description
1	HIGH RISK	Common Stock	Common Stock are pure equity class of instruments . Have no residual claims on the assets of the company
2		Preferred / preference Shares	These are quasi equity instruments, have a periodic payment associated along with the features of equity shares
3		Junk Bond	Junk bonds are Unsecured and high yielding bonds. High risk and high returns are there. High probability of default
4		Corporate Bond	Corporate bonds risk are based on the rating received by them. Generally not backed by any asset class
5		Mortgage bond	Mortgage bonds are fixed income instruments. Backed by a mortgage property and hence secured type of fixed income bonds
6		Commercial Paper	Commercial paper are unsecured money market instruments hence they have higher risk than T bills and t notes
7		T-Note	Treasury Notes are also secured money market instruments Their maturity profiles are longer than that of Tbills . Maturity up to 10 years
8	LOW RISK	T-Bill	Treasury bills are the most secured from of money market instrument backed by the government promise to pay Matures from 3M to within a Year

Thanks