Walk me through a typical capital structure and who gets paid first.
What the interviewer is testing
Seniority, security and the risk–return trade-off across the structure.
Answer it out loud firstTake 30–60 seconds, as you would in the room. Then compare with the model answer.
Show the model answer
From the top: senior secured debt — bank loans and secured bonds, backed by the company's assets — then senior unsecured bonds, subordinated or high-yield debt, mezzanine and PIK notes, preferred equity, and finally common equity. In a default, claims are paid in that order, so each layer down is riskier and demands a higher return.
The full answer
| Layer | Security | Typical cost | Recovery in default |
|---|---|---|---|
| Revolving credit facility, term loans | Senior secured | Lowest | Highest |
| Senior secured bonds | Senior secured | Low | High |
| Senior unsecured bonds | Unsecured | Medium | Medium |
| Subordinated / high-yield notes | Contractually junior | Higher | Lower |
| Mezzanine, PIK | Deeply subordinated | High | Low |
| Preferred equity | Equity | Higher | Little |
| Common equity | Residual claim | Highest expected return | Usually nothing |
Two kinds of subordination
- Contractual: the documents say one tranche is paid after another.
- Structural: debt at a holding company ranks behind all creditors of the operating subsidiaries.
"Bond" or "loan" is a format, not a rank: a bond can be senior secured.
Mistakes to avoid
Saying bonds always rank behind loans.
Follow-ups they may ask
How did your answer compare?
Log in to keep track of the questions you’ve mastered.