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Fixed Income Q120

0. Analyst 1: In practice during bankruptcy the claims on assets are going to be paid off as per the seniority ranking. Hence, secured bondholders should be 100% assured that their claims will be paid off before any other bondholders.
Analyst 2: In practice during bankruptcy the claims on assets are likely to be paid off as per the seniority ranking. However, in some cases, the claims might be paid off in a way that is not in line with seniority ranking. Hence, secured bondholders also face some risk.
Which analyst’s statement is most likely correct?

  • Option : B
  • Explanation : Analyst 2 is correct. In case of bankruptcy, the claims on assets are likely to be paid off as per the seniority ranking. However, in some cases, the claims might be paid off in a way that is not in line with seniority ranking. Hence, secured bondholders also face some risk.
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