We all know that there are different types of debts on the market. Some debts are designed for private customers, while other are intended for commercial corporations and ventures. A subordinated debt, the kind of debt we are going to discuss in this article, is a commercial debt used by corporations and enterprises to generate the funds they need to expand.

To put it in simple words, a subordinated debt is a debt that is rated less than primary debts. If a company takes out a subordinated debt and it goes bankrupt, all other financial obligations – including taxes and obligations to stakeholders – are paid first before the subordinated debt.

As the name suggests, a subordinated debt is a secondary debt by nature. It is not prioritized in terms of payment in the even of a bankruptcy, so this kind of debt does carry more risks compared to conventional types of loans. However, banks, financial institutions, and even individuals are still interested in giving subordinated loans to corporations.

The main reason why subordinated debts are still very popular on the market is because of the higher yield. Since lenders carry more risks, the subordinated loans usually come with a higher interest rate compared to the base market interest rate. This means lenders get compensated for the extra risks they are taking on.

A subordinated debt is also known as junior debt, while primary loans are known as senior debts. It is also quite common for banks to give subordinated loans not only as an investment but also as a tool for measuring the state of the market; banks can then see the primary and secondary prices of subordinated debt certificates when they are out on the market.

Those are the basics of subordinated debt. Stay tuned for more resources because we are going to discuss about other aspects of subordinated debts right here on this site.