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Series 7 practice questioneasyDebt Securities — Corporate Bonds — Subordinated Debenture

In the event of a corporate liquidation, subordinated debentures are paid:

  1. ABefore all other creditors
  2. BOnly after common stockholders are paid
  3. CAfter preferred stockholders but before common stockholders
  4. DAfter secured bonds and senior debentures but before preferred stockholders✓ Correct answer
Explanation

Why D — After secured bonds and senior debentures but before preferred stockholders

Subordinated debentures have a lower claim priority than secured bonds and senior unsecured debentures, but they rank higher than preferred and common stockholders in a liquidation. The complete priority order is: secured creditors, senior unsecured creditors, subordinated debentures, preferred stockholders, and common stockholders. The lower priority means subordinated debentures typically offer higher yields to compensate for the additional risk.

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