Subordination
Asset-Backed Securities glossary · Tranching & Structural Mechanics
Definition
Structural protection in which junior tranches absorb losses before senior tranches.
Subordination in plain English
When a pool of loans is packaged into bonds, it gets sliced into layers ranked by who gets paid first and who eats losses first — subordination just means the lower (junior) layers take the hits before the top (senior) layers feel anything. It's a built-in safety cushion: as long as the losses stay small enough to be soaked up by the bottom slices, the senior investors get paid in full. Picture a stadium during a flood — the cheap seats at field level get soaked first, and the water has to rise a lot before it reaches the top rows. Senior investors accept a lower interest rate precisely because those junior slices sit underneath them absorbing the damage.
Learn these first
Related Asset-Backed Securities terms
Asset-Backed Securities practice questions · Asset-Backed Securities flashcards · Asset-Backed Securities study guide