Debenture

Rank these corporate claims from HIGHEST to LOWEST priority in a liquidation: debenture, secured bond, subordinated debenture.

1. A.Debenture, then secured bond, then subordinated debentureSecured bonds outrank ordinary debentures.
2. B.All three rank equallyCollateral and subordination create clear priority differences.
3. C.Subordinated debenture, then debenture, then secured bondThat reverses the true priority order.
4. D.Secured bond, then debenture, then subordinated debentureCorrect — collateral first, then general creditors, then subordinated claims.

Why: Secured bondholders are paid first from their collateral, then general creditors including debenture holders, and subordinated debentures last among the three.

Harrow Industries issues 10-year notes that pledge no specific collateral, relying solely on the strength of its A-rated general credit. A debenture is:

1. A.Unsecured corporate debt backed by the issuer's creditCorrect - no specific collateral.
2. B.A government-guaranteed bondThe phrase full faith and credit appears in both contexts, which is what makes this tempting. On a debenture it refers to the issuing corporation's own general creditworthiness, with no federal guarantee anywhere in the structure.
3. C.A bond secured by real estatePledging real property describes a mortgage bond, a secured instrument. A debenture is defined by the absence of any specific collateral, leaving the holder to rely on the company's overall ability to pay.
4. D.A type of common stockA debenture is a debt security, so its holder is a creditor entitled to fixed interest and repayment of principal. Common shareholders own the company and stand behind every creditor, including debenture holders, in a liquidation.

Why: A debenture is backed by the issuer's full faith and credit, not by specific collateral.

A corporation is liquidated in bankruptcy. Its capital structure includes secured bondholders, unsecured debenture holders, preferred stockholders and common stockholders. The common stockholders will be paid:

1. A.Last, after all creditors and all preferred stockholders have been satisfiedCorrect. Common stock carries the residual claim, which is the final position in the liquidation order.
2. B.After secured creditors but ahead of unsecured debenture holdersPlaces equity above debt. Every creditor class, secured or not, outranks every equity class.
3. C.First, because common stockholders are the owners of the corporationThe ownership-equals-priority misconception. Ownership is exactly what makes the claim residual.
4. D.At the same time as preferred stockholders, sharing pro rataIgnores the whole point of preferred: it has liquidation priority over common.

Why: Common stock carries a residual claim. Every creditor class is satisfied first, then preferred stockholders, and common holders receive only what is left over, which is frequently nothing.

Which of the following correctly ranks claims on corporate assets from highest priority to lowest?

1. A.Secured creditors, preferred stockholders, debenture holders, common stockholdersGets the top and bottom right but slots preferred ahead of unsecured debt, which is the classic middle-of-the-stack error.
2. B.Preferred stockholders, secured creditors, debenture holders, common stockholdersPuts an equity class at the top. Preferred is senior only relative to common, never relative to creditors.
3. C.Debenture holders, secured creditors, common stockholders, preferred stockholdersTwo errors: unsecured debt placed ahead of secured debt, and common placed ahead of preferred.
4. D.Secured creditors, debenture holders, preferred stockholders, common stockholdersCorrect. Debt before equity, collateralized debt before unsecured debt, preferred equity before common equity.

Why: Creditors always precede owners. Among creditors, secured claims precede unsecured debentures. Among owners, preferred precedes common.