Which statement best describes subordinated debt according to the source material?

Which statement best describes subordinated debt according to the source material?

• A. A type of debt that has a higher interest rate and a lower priority in case of liquidation or bankruptcy.
• B. A type of debt that has a higher interest rate and a higher priority in case of liquidation or bankruptcy.
• C. A type of debt that has a lower interest rate and a higher priority in case of liquidation or bankruptcy.
• D. A type of debt that has a lower interest rate and a lower priority in case of liquidation or bankruptcy.

Answer: (C)

Subordinated debt sits lower in the capital stack, so it faces higher risk because it gets paid after more senior debts in a liquidation or bankruptcy. To compensate lenders for that added risk, it carries a higher interest rate. Therefore, the best description is a debt type with a higher interest rate and a lower priority in liquidation. Descriptions that imply lower risk or higher priority would describe more secure, not subordinated, debt.

Subordinated debt sits lower in the capital stack, so it faces higher risk because it gets paid after more senior debts in a liquidation or bankruptcy. To compensate lenders for that added risk, it carries a higher interest rate. Therefore, the best description is a debt type with a higher interest rate and a lower priority in liquidation. Descriptions that imply lower risk or higher priority would describe more secure, not subordinated, debt.