What is the priority of lender's claims? How are assets divided in the case of a bankruptcy?
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Bond type Unsecured bonds Debentures Subordinated debentures. Income bonds Secured Bonds Mortgage bonds Collateral trust bonds Equipment trust certificates Characteristics Unsecured bonds that only creditworthy firms can issue. Convertible bonds are normally debentures. Claims are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied. Payment of interest is required only when earnings are available. Commonly issued in reorganization of a failing firm. Secured by real estate or buildings. Secured by stock and (or) bonds that are owned by the issuer. Collateral value is generally 25% to 35% greater than bond value. Used to finance "rolling stock"-airplanes, trucks, boats, railroad cars. A trustee buys the asset with funds raised through the sale of trust certificates and then leases it to the firm; after making the final scheduled lease payment, the firm receives title to the asset. A type of leasing. Priority of lender's claim Claims are the same as those of any general creditor. May have other unsecured bonds subordinated to them. Claim is that of a general creditor but not as good as a senior debt claim. Claim is that of a general creditor. Are not in default when interest payments are missed, because they are contingent only on earnings being available. Claim is on proceeds from sale of mortgaged assets; if not fully satisfied, the lender becomes a general creditor. The first-mortgage claim must be fully satisfied before distribution of proceeds to second- mortgage holders, and so on. A number of mortgages can be issued against the same collateral. Claim is on proceeds from stock and (or) bond collateral; if not fully satisfied, the lender becomes a general creditor. Claim is on proceeds from the sale of the asset; if proceeds do not satisfy outstanding debt, trust certificate lenders become general creditors. Bond type Unsecured bonds Debentures Subordinated debentures. Income bonds Secured Bonds Mortgage bonds Collateral trust bonds Equipment trust certificates Characteristics Unsecured bonds that only creditworthy firms can issue. Convertible bonds are normally debentures. Claims are not satisfied until those of the creditors holding certain (senior) debts have been fully satisfied. Payment of interest is required only when earnings are available. Commonly issued in reorganization of a failing firm. Secured by real estate or buildings. Secured by stock and (or) bonds that are owned by the issuer. Collateral value is generally 25% to 35% greater than bond value. Used to finance "rolling stock"-airplanes, trucks, boats, railroad cars. A trustee buys the asset with funds raised through the sale of trust certificates and then leases it to the firm; after making the final scheduled lease payment, the firm receives title to the asset. A type of leasing. Priority of lender's claim Claims are the same as those of any general creditor. May have other unsecured bonds subordinated to them. Claim is that of a general creditor but not as good as a senior debt claim. Claim is that of a general creditor. Are not in default when interest payments are missed, because they are contingent only on earnings being available. Claim is on proceeds from sale of mortgaged assets; if not fully satisfied, the lender becomes a general creditor. The first-mortgage claim must be fully satisfied before distribution of proceeds to second- mortgage holders, and so on. A number of mortgages can be issued against the same collateral. Claim is on proceeds from stock and (or) bond collateral; if not fully satisfied, the lender becomes a general creditor. Claim is on proceeds from the sale of the asset; if proceeds do not satisfy outstanding debt, trust certificate lenders become general creditors.
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Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
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