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Question: Arrange the following sources of finance of Par Co in order of the risk to the investor with the riskiest first.
[ Ordinary shares, bank loan, redeemable preference share, loan note ]
The loan notes are secured on non-current assets of Par Co and the bank loan is secured by a floating charge on the current assets of the company.
The correct answer is: Ordinary shares > redeemable preference share > bank loan > loan note.
My question is why the bank loan is riskier than the loan note? Is it because of the bank loan is secured by a floating charge?
Thank you in advance, Sir!
Partly, but also because the interest on a bank loan varies whereas the interest on loan notes is fixed.
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