Series 79: Ranking In Capital Structure

Ranking in Capital Structure

Bonds are somewhat more secure than stocks if the issuer faces liquidation. Just how secure depends on where the bondholder ranks in the issuer’s capital structure. Secured bonds have the highest priority in bankruptcy; as already discussed, secured bondholders have the right to sell off the assets that secure the bond to satisfy their claims.

Unsecured bonds may be senior or subordinated. As the name suggests, senior bondholders have a higher priority, meaning they get paid before holders of bonds with a lower ranking in the capital structure, such as subordinated bonds. Because of the increased risk associated with subordinated bonds, they usually bear higher interest rates than senior debt.

As lenders, all bondholders have a higher priority in liquidation than stockholders, who are owners. We discuss bankruptcy priorities in more detail in Chapter 18.

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