Which security is generally considered the highest risk among the following?

Which security is generally considered the highest risk among the following?

• A. AAA corporate bond
• B. US government bond
• C. Revenue bond
• D. Cumulative preferred stock

Answer: (D)

Understanding risk differences comes from debt versus equity and who gets paid first. Government securities are backed by the government and are viewed as the safest, with a very low chance of default. A high-quality corporate bond also has very low default risk and provides fixed payments, though it carries more risk than a government bond. A revenue bond is a form of debt secured by a specific revenue stream; if those revenues falter, debt service can be at risk, raising its risk above high-grade corporate debt in some scenarios. Cumulative preferred stock, while it offers a fixed dividend and has priority over common stock, remains an equity claim and sits behind all debt in liquidation. Dividends can be skipped, and in bankruptcy there’s no guarantee of recovering principal; even with the cumulative feature, missed payments don’t become guaranteed future payments. Since debt holders are paid first and equity is last in liquidation, cumulative preferred stock generally carries the highest risk among these options.

Understanding risk differences comes from debt versus equity and who gets paid first. Government securities are backed by the government and are viewed as the safest, with a very low chance of default. A high-quality corporate bond also has very low default risk and provides fixed payments, though it carries more risk than a government bond. A revenue bond is a form of debt secured by a specific revenue stream; if those revenues falter, debt service can be at risk, raising its risk above high-grade corporate debt in some scenarios. Cumulative preferred stock, while it offers a fixed dividend and has priority over common stock, remains an equity claim and sits behind all debt in liquidation. Dividends can be skipped, and in bankruptcy there’s no guarantee of recovering principal; even with the cumulative feature, missed payments don’t become guaranteed future payments. Since debt holders are paid first and equity is last in liquidation, cumulative preferred stock generally carries the highest risk among these options.