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Any debt with lesser priority qualifies as subordinated debt. Suppose a company issues two bonds: Bond A and Bond B. The company fails and is forced to liquidate its assets to pay off debt. The money owed to Bond A holders is considered the priority debt, so Bond B debt holders will be paid off only after all Bond A holders are repaid.
Debt in the form of loans or debt securities (e.g. bonds and CDs) are classified as unsubordinated debt if claims on revenues and capital assets by lenders and/or investors take priority over the repayment of other related debt. Related debt with a lower payment priority is called subordinated debt and is, consequently, considered riskier than ...
When something is subordinate, it ranks below the claims of other investors. The opposite of subordinate is 'senior.'. A subordinate claim on a company's assets is payable only after the claims that are senior have been paid. For example, let's assume Company XYZ has $100 million in assets, but it has filed Chapter 7 bankruptcy and is liquidating.
Accordingly, lenders of junior debt (those lenders further down in the pecking order) are more likely to get stiffed. This is why some lenders might require senior status in order to make a loan (meaning that they must be first in line). In our example, Bank ABC may charge a higher interest rate on the loan because of its subordinated status ...
This is why some lenders might require senior status in order to make a loan (meaning that they must be first in line). In our example, Bank ABC may charge a higher interest rate on the loan because of its subordinated status and thus added risk of not being able to get its hands on any of the scraps if Company XYZ goes bankrupt. Senior debt is ...
A great deal of corporate debt is in the form of debentures, but the government and government entities also issue debentures (Treasury securities are one example). Like other bonds, investors can purchase debentures through brokers. Debentures are usually issued in $1,000 or $10,000 denominations of varying maturities.
The distinction between senior debt and subordinated debt is crucial for creditors and investors. Senior debt is considered less risky than subordinated debt because it is first in line to be repaid once means for repayment have become available. That means that the interest rate paid on senior debt is lower than that paid on unsecured debt.
Issuers typically use municipal bond proceeds to finance day-to-day operating activities or capital expenditures for the public good such as road, hospital, school, or infrastructure projects. There are many kinds of municipal bonds, but the two most prominent are general obligation bonds and revenue bonds. General obligation bonds are repaid ...
QUIPS are essentially subordinated debt issued by the parent, but they look like preferred stock. However, because the parent is technically getting a loan from its subsidiary, it gets to deduct the interest payments on its tax return .
A synthetic collateralized debt obligation, commonly called a synthetic CDO, seeks to generate income from swap contracts, options, and other non-cash derivatives rather than straightforward debt instruments such as bonds, student loans, or mortgages. Similar to other types of CDOs, synthetic CDOs are issued in graduated tranches of relative ...