What are the differences between Senior Bonds and Subordinates Bonds?
Senior Bonds: These bonds hold a higher position in the hierarchy of payment during liquidation or bankruptcy of the bond issuer. In such scenarios, senior bondholders are prioritized over subordinate or junior bondholders for repayment. They are considered lower risk due to this priority status in repayment and usually offer lower interest rates compared to subordinate bonds.
Subordinate Bonds: These bonds hold a lower priority status in the repayment hierarchy. In the event of liquidation or bankruptcy of the bond issuer, subordinate bondholders are paid only after senior bondholders have been fully compensated. Subordinate bonds typically come with higher returns to compensate for the increased risk associated with lower priority in repayment.
The distinction between senior and subordinate bonds reflects the risk-return trade-off in bond investments. Senior bonds offer lower risk but lower returns, while subordinate bonds offer higher potential returns but come with higher risk due to their lower priority in repayment during adverse situations like liquidation.
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