Which statement describes subordinated debt according to the source material?

Which statement 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 lower interest rate and a higher priority in case of liquidation or bankruptcy.
• C. A loan with no interest.
• D. An equity instrument.

Answer: (B)

Subordinated debt is debt that ranks behind other debts in repayment. In liquidation, senior creditors are paid first, and subordinated debt is paid only after those claims are satisfied, making it riskier for lenders. To compensate for that higher risk, subordinated debt typically carries a higher interest rate than senior debt. That combination—lower priority in liquidation and a higher interest rate—best describes subordinated debt. The other options describe things that aren’t subordinated debt (a loan with no interest, or an equity instrument).

Subordinated debt is debt that ranks behind other debts in repayment. In liquidation, senior creditors are paid first, and subordinated debt is paid only after those claims are satisfied, making it riskier for lenders. To compensate for that higher risk, subordinated debt typically carries a higher interest rate than senior debt. That combination—lower priority in liquidation and a higher interest rate—best describes subordinated debt. The other options describe things that aren’t subordinated debt (a loan with no interest, or an equity instrument).