Fixed Income MCQ - Fixed Income Section 2

46 Which of the following would most likely have the lowest priority of claims in a bankruptcy proceeding?

Among the listed for priority of claims senior secured debt comes first, followed by senior unsecured debt followed by senior subordinated debt.

47 An organization issued the following categories of option free bonds. The bond with the highest yield most likely is:

Based on seniority ranking junior subordinated bonds has last right among the listed bonds. Hence, they have the highest credit risk than the other two options. Hence, these would offer highest yield.

48 Which of the following is most likely to be a category of secured debt?

Second lien debt is a category of secured debt. Debentures and subordinated debt are categories of unsecured debt.

49 Which of the following is least likely to be a reason for issuance of subordinated debt?

Subordinated debt is a form of unsecured debt and is not ranked higher in the priority of claims.

50 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?

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.