CFA Level IFixed IncomeEasy
A corporate issuer defaults and enters liquidation. Which of the following claimants has the highest-priority claim on the firm's remaining assets?
- AFirst mortgage (senior secured) bondholders
- BSubordinated debenture holders
- CPreferred shareholders
- DSenior unsecured bondholders
Show answer & explanationAnswer & explanation
Correct answer: A. First mortgage (senior secured) bondholders
Secured creditors with a specific pledge of collateral, such as first mortgage bondholders, rank above senior unsecured debt, subordinated debt, and all equity claims in the priority of claims during liquidation.
Why the other options are wrong
- B. Subordinated debt ranks below senior debt of any kind.
- C. Preferred shareholders are equity holders and rank below all creditors.
- D. Senior unsecured debt ranks below secured debt because it has no specific collateral pledge.
Priority of Claims
The order in which creditors and shareholders are paid in liquidation, based on seniority and whether the claim is secured or unsecured.
- Secured debt > unsecured debt > subordinated debt > preferred equity > common equity
- Collateral pledges create priority within the same seniority class
- Bond indentures specify seniority ranking
Memory trick: 'Secured Sits Senior, Subordinated Sits Last'