utcher Company plans to issue bonds to raise $10 million to finance expansion. It could use 10-year mortgage bonds backed by the firm's fixed assets, 10-year debentures that are not backed by any specific assets but are backed by the firm's general earning power, or 10-year subordinated debentures that would be subordinated to all of the firm's other debt. If it uses mortgage bonds, they would be rated A by Moody's and S&P, and their market interest rate would be 7.5%. Given this information, which of the following statements is most correct?
a. Given the 7.5% interest rate on the mortgage bonds, the plain debentures might carry an interest rate of 8.0% and the subordinated debentures a rate of 8.5%.
b. The subordinated debentures would be rated highest, probably AA.
c. Since bond ratings are highly subjective, information about the rating and interest rate on the A-rated bond tells us nothing about how the two types of debentures would be rated, or about their likely interest rates.
d. Given the 7.5% interest rate on the mortgage bonds, the subordinated debentures might carry an interest rate of 8.0% and the plain debentures a rate of 8.5%.
e. The debentures would be rated highest, probably AA.