GE has the following securities outstanding: a senior bond, ajunior bond, a preferred stock, and...

GE has the following securities outstanding: a senior bond, a junior bond, a preferred stock, and a common stock. The preferred stock should carry __________ and ________ compared to the junior bond.

		higher risk, lower expected return
		lower risk, lower expected return
		higher risk, higher expected return
		lower risk, higher expected return

Expert Solution

Lower risk, lower expected return

The term "stock" refers to ownership or equity in a firm. There are two types of equity - common stock and preferred stock. Preferred stockholders have a higher claim to dividends or asset distribution than common stockholders.1 The details of each preferred stock depend on the issue. Preferred stock has characteristics of both bonds and common stock which enhances its appeal to certain investors.

Junior debt refers to bonds or other forms of debt issued with a lower priority for repayment than other, more senior debt claims in the case of default. Because of this, junior debt tends to be riskier for investors, and thus carries higher interest rates than more senior debt from the same issuer.

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