Question

Sludge Corporation has two bonds outstanding, each with a face value of $2.85 million. Bond A is a senior bond; bond B is subordinated. Sludge has suffered a severe downturn in demand, and its assets are now worth only $4.70 million. If the company defaults, what payoff can the holders of bond B expect?

Answer 1

Answer: 1.85 bond

Explanation: Several organisation nowadays issue different bonds with different rights and obligations. Senior bond refers to those bonds which gets priority over other bonds in case of distribution of interest and in case of liquidation.

The subordinate bonds gets priority over common and preferred shares but they come after the senior bonds.

Hence, in case of default by the company the senior bonds will get their full share of $2.85 million and the remaining will go to subordinate bond.