In equipment finance, subordinated debt relative to senior debt typically has what characteristics?

• A. Subordinated debt has a higher interest rate and a lower priority in liquidation or bankruptcy.
• B. Subordinated debt has a higher interest rate and a higher priority in liquidation or bankruptcy.
• C. Subordinated debt has a lower interest rate and a lower priority in liquidation or bankruptcy.
• D. Subordinated debt has a lower interest rate and a higher priority in liquidation or bankruptcy.

Answer: (A)

In equipment finance, subordinated debt sits behind senior debt in the repayment order, so it has a lower priority in liquidation. Because it carries more risk for lenders, the return demanded is higher, which means a higher interest rate for subordinated debt compared with senior debt. This risk–reward setup explains why the typical characteristics are a higher interest rate and a lower priority in liquidation or bankruptcy. The alternatives conflict with the standard repayment waterfall (senior debt gets paid first) and with risk-based pricing (subordinated debt isn’t cheaper to borrow).