Question

The distinction between senior and subordinated debt is associated with:

a)general debenture bonds

b)mortgage bonds

. c)collateral trust bonds.

d)commercial bonds.

Answer 1

the main difference between senior and subodinate debt is that incase of bankruptcy or liquidation the senior debt is given priority over subordinate debt. So any bond which is given priority for payment is called senior bond and any bond given less priority is called subordinate bond. This makes senior bond more secure than subordinate bonds. Often senior bonds are secured with assets.

commercial bonds are a type of subordinate bond as they are not as secure as senior bonds.

Bonds are first classified as senior or subordinate bond and then sub categorized into mortgage bond or commercial bond etc

So any bond in general is either senior or subordinate. The distinction is on the basis of priority and not on the basis of type of bond that is mortgage or commercial bond.

As any bond can be senior or subordinate depending on the priority of the bond at the time of liquidation.

Answer is (a) general debenture bond

note that mortgage bonds and collateral trust bonds. are type of senior debts as they are more secure and have mortgage associated with them

Yes collateral is given in case of mortgage bonds. But that makes it a senior bond. For a bond to be a senior bond mortgage is optional though. Mortgage or collateral is not compulsory and companies can opt to issue senior bonds without mortgage still giving them priority in case of liquidation