CFA Level I · CFA Level I Exam · Credit Analysis for Corporate Issuers
Two bonds are issued by the same company: a senior unsecured bond and a subordinated bond. Compared with the senior unsecured bond, the subordinated bond most likely has:
The subordinated bond has a lower expected recovery rate and a higher yield. Its claim ranks behind senior unsecured debt, so loss given default is greater, and investors require additional spread as compensation.
- Aa lower expected recovery rate and a higher yieldCorrect
- Ba higher expected recovery rate and a lower yield
- Cthe same expected recovery rate and a higher yield
Explanation
Subordinated debt ranks lower in the priority of claims, so its expected recovery in default is lower. Investors demand extra yield to compensate for the larger loss given default. The other options contradict this ranking.
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