Subordinated Debt – What it is and How it Works

Subordinated debtSubordinated debt is another name for any debt which is behind senior debt in line to be paid in the event of bankruptcy.  Should a company liquidate or fall into bankruptcy and be forced to liquidate, holders of subordinated bonds will be paid after all claims by senior debtholders are satisfied.  While subordinated debtholders are behind senior debt holders, they are ahead of stockholders in the corporation.

For the above reasons subordinated debt is expected to provide a higher return than senior debt, and a lower return than the company’s equity holders.  Depending on the situation subordinated debt can also be referred to as mezzanine debt, junior debt, or sub-debt.

For the definition and explanation of more bond related words visit the Learn Bonds glossary where we give the meaning of many additional terms.

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