Subordinated debt
Principles of Finance glossary · Principles Of Finance
Definition
Debt with a lower claim priority in liquidation than senior debt.
Subordinated debt in plain English
Imagine a company runs out of money and has to sell everything to pay back the people it borrowed from. There's a line, and whoever is at the front gets paid first. "Subordinated" debt is at the BACK of that line, behind the "senior" lenders — its holders only get paid once the senior lenders are fully repaid, and if the cash runs out, they get little or nothing. Because that's riskier, subordinated lenders demand a higher interest rate to make the gamble worth it. Think of it as buying a concert ticket that only gets you in if there are seats left after the VIP holders are all seated.
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