Question

You are considering buying the bonds of ABC Corp. They have a $1000 Par Value an 8% Coupon and have 3 years remaining until maturity. Coupon payments are made semi-annually. The bonds are rated BB and other BB bonds of similar maturities are currently priced to yield 4%. ABC Corp. has also issued preferred stock with a par value of $25.00. Should ABC Corp. declare bankruptcy, which issue is more likely to have a par value recovery in a reorganization or liquidation?

1. The $1000 par value bonds
2. The $25.00 par value preferred
3. Impossible to say – a bankruptcy judge determines which will be paid first.

Answer 1

Option A is correct!!.

In case of liquidation of company debt holders have first priority claim on assets than preference shareholders or equity shareholders. Therefore as debtholders claim on asset is first, they will more likely to have par value recovery than preference shareholders.

In case of bankruptcy judge too, they decides according to bankruptcy code which also states that debt holders have prior claim on assets than any equity or preferred holders.

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