Subordinated debentures are unsecured debt that ranks lower than other debt in liquidation.

Subordinated debentures are unsecured debt that ranks lower than other debt in liquidation.

• A. Subordinated debentures
• B. Debentures
• C. Mortgage bonds
• D. Equipment Trust Certificates

Answer: (A)

Debt priority in liquidation is being tested. In a company's capital structure, secured debt is paid first, followed by senior unsecured debt, and only after those comes subordinated debt. Subordinated debentures are unsecured notes that are explicitly positioned below other debt in the repayment hierarchy, so their holders receive payments only after senior creditors are satisfied. This is why they match the description of ranking lower in liquidation. By contrast, mortgage bonds and Equipment Trust Certificates are secured by collateral and have higher priority, and plain debentures are unsecured but not necessarily subordinated to all other debt. The key idea is the order of repayment in liquidation and how subordinated debt sits below others.

Debt priority in liquidation is being tested. In a company's capital structure, secured debt is paid first, followed by senior unsecured debt, and only after those comes subordinated debt. Subordinated debentures are unsecured notes that are explicitly positioned below other debt in the repayment hierarchy, so their holders receive payments only after senior creditors are satisfied. This is why they match the description of ranking lower in liquidation. By contrast, mortgage bonds and Equipment Trust Certificates are secured by collateral and have higher priority, and plain debentures are unsecured but not necessarily subordinated to all other debt. The key idea is the order of repayment in liquidation and how subordinated debt sits below others.