Subordinated Debentures

A subordinated debenture is a debenture bond which carries a lower payment mode than the other debentures. Because of the higher risk it carries, it also offers higher interest rates.

Subordinated debentures also enjoy a higher discount in the secondary market because of the higher interest they provide to the debenture holder. However, it is important to keep in mind that you should not expect payment from a subordinated debenture before other corporate debts have been satisfied.
A debenture is an unsecured loan offered by an individual to a company. Without paying any collateral for the debenture, the company pays a high rate of interest to the investors who actually lend credit to the company. If bankruptcy or any kind of financial crisis occurs, the bondholders are given priority over the debenture holders in terms of payments. Debentures are always different from stocks and bonds, but basically, all three are different forms of investment.


When somebody decides to invest in stocks, he or she becomes one of the owners and thus, becomes a shareholder of the good and bad times of the company. The investor faces uncertain fortunes related to the company's financial graph. So this explains the amount of risk related to stock-investments. But debentures are more secured investment, as payments with high interest rates are guaranteed. The company is bound to pay interest on the borrowed money, and once the debenture matures, all the borrowed money is returned. In other words, the investors gain interest as income from the debentures.
Subordinated debenture and bonds are similar, but bonds carry more security than debentures. In both of these investment forms, interest and value is guaranteed, but in case of liquidation, bond holders receive the payment first, followed by the senior bonds, and only after that comes the subordinated debenture holders, who have no collateral which they can claim from the company in case bankruptcy takes place. To compensate for the possibility of such losses, high interest rates are paid to the subordinated debenture holders.