CFA Level I · CFA Level I Exam · Credit Risk
In a bankruptcy that follows the absolute priority rule, which of the following claims is most likely to be paid first from the proceeds of the liquidation?
First-lien secured debt backed by pledged collateral is paid first. Under the absolute priority rule, secured creditors have the highest claim on the collateral proceeds, ahead of senior unsecured bonds, which in turn rank ahead of subordinated debentures and equity holders.
- ASenior unsecured bonds
- BSubordinated debentures
- CFirst-lien secured debt backed by the pledged collateralCorrect
Explanation
Under the absolute priority rule, secured creditors are paid first from the collateral pledged to them. Senior unsecured bonds rank below secured claims, and subordinated debentures rank below senior unsecured debt.
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