CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
Compared with a senior unsecured bond from the same issuer, a subordinated bond is most likely to have:
A subordinated bond most likely has a higher loss severity given default. It ranks below senior unsecured claims in the priority of payment, so expected recovery is lower, while the issuer's probability of default is unchanged.
- Aa lower probability of default
- Ba higher loss severity given defaultCorrect
- Ca higher expected recovery rate
Explanation
Subordination ranks the bond lower in the claim priority, so recovery is lower and loss severity is higher. The issuer's default probability is the same for both bonds since it is determined at the issuer level.
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