Senior and subordinated bonds are two distinct types of bonds that differ in their priority of repayment in case of a company's financial distress or bankruptcy.

The information regarding the standing of a bond in the case of a bankruptcy or other major event, are included in the bond prospectus, which also includes the financial results of the issuing company. 

Senior Bonds

Senior bonds are debt securities that have a higher claim on a company's assets and income compared to other types of debt. 

In the event of a company's bankruptcy or liquidation, senior bondholders are among the first to receive repayment, typically before subordinated bondholders and equity shareholders.

Here are the key characteristics of senior bonds:

• Priority of Repayment: Senior bondholders have a higher priority for repayment of their principal and interest when the company's assets are distributed during bankruptcy proceedings. Senior bondholders receive their capital before other bondholders and stockholders
• Lower Risk: They are considered less risky than subordinated bonds because of their higher priority, and as a result, they often have lower interest rates
• Stability: Senior bonds are generally more stable and less likely to experience price fluctuations compared to subordinated bonds
• Lower Yields: Because of their lower risk, senior bonds typically offer lower yields or interest rates compared to subordinated bonds or other forms of debt

Subordinated Bonds

Subordinated bonds, also known as junior bonds or subordinated debt, are debt securities that have a lower claim on a company's assets and income in comparison to senior bonds.

In case of financial distress or bankruptcy, subordinated bondholders are only paid after senior bondholders have been fully satisfied.

Here’s how subordinated bonds work:

• Lower Priority: Subordinated bondholders have a lower priority for repayment, which means they are at higher risk of not receiving full repayment in case of financial difficulties
• Higher Risk and Yield: Due to their higher risk, subordinated bonds typically offer higher yields or interest rates compared to senior bonds to compensate investors for the increased risk
• Greater Price Volatility: Subordinated bonds are more susceptible to price fluctuations, especially during periods of financial uncertainty, as their repayment depends on the availability of assets after senior obligations are met
• Hybrid Features: Some subordinated bonds may have hybrid features, such as convertibility into equity or the inclusion of options that allow for early redemption under certain conditions

Key Differences Between Senior And Subordinated Bonds

The primary difference between senior and subordinated bonds is the priority of payment in the case of the bankruptcy of the issuer. 

Senior bonds hold a higher repayment priority in the event of bankruptcy or financial trouble, making them less risky and offering lower yields.

In contrast, subordinated bonds have lower priority, posing higher risk but providing potentially higher yields.

Subordinated bonds are more price-sensitive and may experience greater price fluctuations.

Conservative investors often prefer senior bonds for stability, while those seeking higher returns and accepting higher risk may choose subordinated bonds.

• Some bonds have a higher claim on the issuing company’s assets in the case of a bankruptcy 
• Such bonds are called senior bonds, while other types of bonds are called subordinated 
• Senior bonds are considered to be less risky than subordinated bonds and typically have lower yields 
• During bankruptcy proceedings, senior bondholders are paid back before subordinated bondholders and stockholders