Subordinated (debt)

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Subordinated debt, also known as junior debt, is a finance term to describe debt that is unsecured or has a lesser priority than that of an additional debt claim on the same asset. This means that if the party that issued the debt defaults on it, people holding subordinated debt get paid after the holders of the "senior debt". A subordinated debt therefore carries more risk than a normal debt.

Subordinated debt has a higher expected rate of return than senior debt due to the increased inherent risk.

Also known as "junior security" or "subordinated loan".

Such debt is referred to as subordinate, because the debt providers (the lenders) have subordinate status in relationship to the normal debt. A typical example for this would be when a promoter of a company invests money in the form of debt, rather than in the form of stock. In the case of liquidation (e.g. the company winds up its affairs and dissolves) the promoter would be paid just before stockholders -- assumng there are assets to distribute after all other liabilities and debt has been paid.