Subordinated debt

When a company, or a bank, wants to borrow it can do so by offering investors a number of different types of tradeable debt, or bonds.

The least risky type of debt is often secured. This means the lender, or bondholder, has first claim over certain assets – say, land – in the event that interest or the original capital is not repaid or the issuer goes bust. Other lenders will accept less, or perhaps no security, but will expect a higher return, or yield.

Standard bonds usually rank below secured bonds and alongside other commercial creditors (such as trade suppliers) in the event of the bankruptcy of the issuer.

Below them come the holders of subordinated debt. These are lenders willing to accept a high yield in the good times knowing that if something goes wrong they will rank below most other bondholders when it comes to paying them back.

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