CFA Level I · CFA Level I Exam · Credit Risk
Holding all else equal, which bond is most likely to have the highest recovery rate in a default?
The senior secured bond is most likely to have the highest recovery rate. It has first claim on specific pledged collateral and ranks ahead of unsecured and subordinated creditors in the priority of claims, so it generally loses the least when default occurs.
- AA subordinated unsecured bond
- BA senior unsecured bond
- CA senior secured bond backed by specific collateralCorrect
Explanation
Seniority and collateral determine priority of claim. A senior secured bond has first claim on pledged assets, so its expected recovery is highest. Senior unsecured ranks below secured creditors for the collateral, and subordinated ranks lower still, so each recovers less.
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