Multiple Choice
A known obligation of an uncertain amount that can be reasonably estimated is called a(n):
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9. Current Liabilities
Types of Liabilities
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Which type of bonds have a claim on assets only after senior debt has been paid in full?
A
Debenture bonds
B
Convertible bonds
C
Secured bonds
D
Subordinated bonds
Verified step by step guidance1
Understand the concept of bond hierarchy: Bonds are categorized based on their claim priority on a company's assets in case of liquidation. Senior debt is paid first, followed by subordinated debt.
Learn the definition of subordinated bonds: These are bonds that have a lower priority claim on assets compared to senior debt. They are only repaid after all senior obligations have been satisfied.
Compare subordinated bonds with other types of bonds: Debenture bonds are unsecured and rely on the issuer's creditworthiness. Convertible bonds can be converted into equity. Secured bonds are backed by specific assets. Subordinated bonds differ because they are specifically ranked below senior debt.
Recognize the risk and reward trade-off: Subordinated bonds typically offer higher interest rates to compensate for their higher risk due to lower priority in asset claims.
Apply this understanding to the question: Subordinated bonds are the correct answer because they explicitly have a claim on assets only after senior debt has been paid in full.
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