Question

Which of the following is the correct ordering of the capital stack (from most secure to least secure)? Review Later Equity -> Subordinated debt -> Senior debt Senior debt -> Equity -> Subordinated debt Senior debt -> Subordinated debt-> Equity Subordinated debt -> Senior debt -> Equity

Answer 1

Answer: Senior debt -> Subordinated debt-> Equity

Step-by-step explanation:

Senior debt to a company is the one with the highest priority when it comes to repayment so it is the most secure. It is usually anchored to some sort of asset as collateral.

Subordinated debt comes after and as such is less secure than the senior debt which means that it will draw a higher interest rate as it has a higher default risk.

Equity would be the least secure because it represents ownership in the company. Earnings such as dividends flowing to Equity holders comes after debt has been paid so they are the least secure and the lowest in priority.