Question

You are looking at a series of rated bonds and other investments and wonder what happens if a firm goes bankrupt. Which statement is most true

a. BBB- and above is considered investment grade and in the event of a bankruptcy they get paid off ahead of bank debt.

b. A b rated bond is considered below investment grade or junk and if it is a debenture it will get paid off after bank debt and senior bonds in a bankruptcy.

c. An A rated bond is investment grade and gets paid off before any senior secured debit

d. In a bankruptcy, preferred stock gets paid off ahead of common stock and bonds get paid off before bank debt

Answer 1

B is most true. Any bond with a rating below BBB is a junk bond. Debentures are not secured, and hence will be paid off after bank debt and senior bonds.

A is not true - bank debt will be usually paid before bonds.

C is not true - Senior secured debt will be paid off first

D is not true - bank debt will be usually paid before bonds.