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FRM Part I · FRM Exam Part I · Corporate Bonds

A firm has senior secured bonds, senior unsecured bonds, subordinated bonds and preferred equity. In liquidation, USD 100 million of value is available. Claims are: senior secured USD 40 million (collateral worth USD 50 million), senior unsecured USD 60 million, subordinated USD 30 million. Assuming absolute priority and that the collateral surplus of USD 10 million goes to the general estate, what is the recovery rate on the senior unsecured bonds?

Senior unsecured bondholders recover 100%. Of the USD 100 million available, USD 40 million repays the secured bonds, leaving USD 60 million, exactly equal to the senior unsecured claim. Under absolute priority, subordinated holders and preferred equity receive nothing.

  1. A100%Correct
  2. B83.3%
  3. C66.7%
  4. D75.0%

Explanation

Collateral worth 50 pays the secured claim of 40, leaving 10 surplus. Total value is 100, so after paying the secured 40, USD 60 remains. The senior unsecured claim of 60 is paid in full, giving a 100% recovery and nothing for subordinated holders. Treating the 100 as shared pro rata across 130 of claims would give 76.9%, which violates priority.

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