## Introduction to Subordinated Debt
Subordinated debt is a lax loan or bond that positions below more senior loans or securities with claims on assets or earnings. Subordinated debentures are also known as junior securities. In the case of default, creditors owning a subordinated debt will not be paid until the senior bondholders are paid in full.
Understanding Subordinated Debt
Subordinated debt is riskier than unsubordinated debt. It can be any loan that's paid after other corporate debts and loans are repaid. Borrowers are normally larger corporations or other business entities.
Types Of Subordinated Debt
1] Bank Loan Or Bond A bond acknowledged by a bank could be a junior debt. This is a clever option for many banks because interest payments are tax-deductible. A study in the year 1999 found that banks issue such a debt to grow their risk level. But, they only give such a loan to big corporations and only after assessing their cash flows and creditability.
2] Mezzanine Debt This debt ranks higher than the common shares of stock at the time of the payment. It is known as a hybrid debt.
3] Asset-backed Security A lender issues this kind of a debt in tranches or in portions. The senior tranches rank high in the terms of payment. A good example of an asset-backed security is mortgage-backed security.
4] Common Stock Preference shares are known to rank higher than the common stock, while debentures rank higher to preference shares.
