We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Senior Bond?

Malcolm Tatum
By
Updated: May 16, 2024
Views: 18,176
Share

A senior bond is a type of debt security that has a superior claim on the assets and income of the entity that issues the bond. This means that in the event that the issuer encounters some type of financial problem, investors who hold a senior bond will be paid before investors holding a bond issue with less claim in the resources of the issuer. Bonds of this type carry less risk, which may be an important factor for some investors.

While bonds are generally considered to be safe investments, securing a senior bond simply adds to the security of the investment. It is important to note that bond issues are structured with varying levels of claim on the assets of the issuer in the event of some type of financial problem. Bonds that have secondary claim on the issuer’s assets are classed as junior bonds. Those with the strongest claim on those same assets are referred to as being senior bond issues.

Along with having a greater claim on the asset of the issuer, a senior bond also differs from a junior bond in terms of the interest rate that applies to the investment. Since a senior debt security carries less risk than a junior debt security, the rate of interest earned with the senior security is less than the rate offered for a junior or subordinated bond. As with most types of investments, the more risk that the investor is willing to assume, the greater the potential return offered by the bond issuer.

There are three common financial problems that may result in an inability to honor bond issues. The issuing entity may encounter temporary cash flow issues, making it difficult to make interest payments on time. Financial setbacks may be so severe that the issuer defaults on the bonds altogether. If the problems are severe enough, the entity may be driven into bankruptcy, where a court decides when and if the debt obligations are repaid.

In situations where at least partial payments on the bond issues are ordered by the court, an investor holding a senior bond will receive his or her portion ahead of the subordinated bond holder. Even in this situation, there is no guarantee that the senior bond holder will receive full compensation, especially in a bankruptcy situation. The only real guarantee is that if any compensation is made to bond holders, those with senior debt securities will be paid ahead of the rest.

Bond issues are generally very safe investments, but that does not preclude the need for an investor to investigate the issuing entity closely before purchasing a senior bond issue. Making sure the entity is stable and is likely to remain so throughout the life of the bond is very important. Taking this course of action greatly increases the chances of earning a full return on the bond, rather than possibly losing money on the investment.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Related Articles

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.smartcapitalmind.com/what-is-a-senior-bond.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.