HELP! WHICH IS THE HIGHEST RISK INVESTMENT?
List the following stocks and bonds in order from highest default risk to lowest default risk:
A municipal bond in a city with a population of 150,000
A common stock in a company under federal investigation
A preferred stock in a 150-year old firm with good business practices
municipal bond, common stock, preferred stock
municipal bond, preferred stock, common stock
common stock, preferred stock, municipal bond
common stock, municipal bond, preferred stock
my answer is c the only question in my mind is the size of the city
I agree.
thank you
The correct answer is:
common stock, municipal bond, preferred stock
In terms of default risk, the highest risk investment is the common stock in a company under federal investigation. This is because the company's financials and operations may be affected by the investigation, potentially leading to a higher risk of default.
The next highest risk investment is the municipal bond in a city with a population of 150,000. Municipal bonds are generally considered to have lower default risk compared to corporate stocks or bonds because they are backed by local governments with the ability to raise taxes or access other revenue sources. However, the risk may still vary depending on the financial stability and creditworthiness of the city.
The lowest risk investment is the preferred stock in a 150-year old firm with good business practices. Preferred stocks typically have less default risk compared to common stocks because they have a higher claim on the company's assets and earnings in case of bankruptcy. Additionally, a long-established firm with good business practices is generally considered more stable and less likely to default.
To determine the order of default risk for the given stocks and bonds, we need to consider several factors. Default risk refers to the likelihood that a borrower, in this case, the entity issuing the stock or bond, will be unable to make timely payments of interest or principal.
1. Municipal Bond in a city with a population of 150,000: Municipal bonds are generally considered to have a lower default risk because they are backed by the issuing municipality's ability to generate revenue through taxes and fees. However, the default risk can vary based on the financial health of the city. Without information about the financial condition of the specific city, it is difficult to determine the default risk accurately. So, we'll assume a moderate default risk for this bond.
2. Common Stock in a company under federal investigation: Common stocks represent ownership in a corporation and are considered riskier than bonds. If a company is under federal investigation, it can significantly impact the company's financial stability and share value. Therefore, a common stock in such a company poses a higher default risk.
3. Preferred Stock in a 150-year old firm with good business practices: Preferred stocks are a type of equity investment that has a preference when it comes to dividends and liquidation. While preferred stocks generally carry lower default risk than common stocks, the default risk may still exist if the company faces financial distress. However, considering the 150-year existence of the firm and its good business practices, the default risk for this preferred stock is likely lower than the common stock but higher than the municipal bond.
Based on the above analysis, the correct order of default risk for the given investments would be:
common stock, preferred stock, municipal bond
Therefore, option C: common stock, preferred stock, municipal bond, is the correct answer.