Skip to content

FRM Part II · FRM Exam Part II · Distress Symptoms and Remedies

A distressed-debt fund manager is comparing two claims in the capital structure of a bankrupt manufacturer. Under the absolute priority rule applied in a typical Chapter 11 reorganization, which statement best describes how value is distributed?

Absolute priority means each class must be paid in full before a more junior class receives anything. Senior secured creditors come first, then unsecured, then subordinated creditors, and equity holders last. Equity is the residual claim, so it only receives value if all debt claims are fully satisfied.

  1. ASenior secured creditors are paid in full before unsecured creditors receive anything, and unsecured creditors are paid in full before equity holders receive anythingCorrect
  2. BAll creditors share losses pro rata regardless of seniority, and equity is wiped out last
  3. CEquity holders are paid first because they bear the residual risk, followed by subordinated debt and then senior debt
  4. DUnsecured creditors are paid before secured creditors because secured claims are covered by collateral

Explanation

Absolute priority means claims are satisfied in order of seniority: secured, then unsecured, then subordinated, then equity. Pro rata sharing across all classes contradicts this ordering. Equity is the residual claim and is paid last, not first.

Did you get it right without looking?

One question tells you little. A timed set on Distress Symptoms and Remedies shows your real accuracy, how long you take and where you lose marks.

Practise Distress Symptoms and RemediesFree diagnostic mock

More Distress Symptoms and Remedies questions