Definition of Senior Security
Senior security refers to a type of financial instrument that holds a higher claim on assets and earnings compared to junior obligations and equity. In the hierarchy of repayment during liquidation, senior securities are given priority over junior securities. Common examples of senior securities include notes, bonds, and debentures. Within the debt structure, mortgage bonds are categorized in levels of priority, with first mortgage bonds being senior to second mortgage bonds, and all mortgage bonds holding seniority over unsecured debentures.
Examples of Senior Security
First Mortgage Bonds: These bonds are backed by the pledge of specific assets, typically real property, and have the highest priority claim on the assets of the issuer in the event of liquidation.
Corporate Bonds: General category of senior debt instruments secured by the corporation’s assets or earnings, thus having priority over subordinate debt like debentures.
Debentures: Unsecured bonds that rank below secured debt like mortgage bonds but above all forms of equity.
Frequently Asked Questions (FAQ)
What distinguishes senior from junior securities?
Senior securities have a higher claim on a corporation’s assets and earnings compared to junior securities. In liquidation, senior securities are repaid first.
What types of debt are considered senior securities?
Senior securities include notes, bonds, and debentures. First mortgage bonds are an example of highly senior debt, followed by second mortgage bonds, then debentures.
Are stocks considered senior or junior securities?
Stocks are considered junior securities because they have the lowest priority claim on a corporation’s assets in the event of liquidation.
What happens to senior securities during liquidation?
During liquidation, senior securities are repaid before any junior securities, such as subordinate debt or equity.
Can the priority of senior securities change?
Generally, the priority of senior securities does not change unless there is a restructuring arrangement or new issuance with a higher priority.
Related Terms and Definitions
Mortgage Bonds: Bonds secured by the pledge of specific assets, giving them priority over unsecured bonds (debentures).
Debentures: Unsecured bonds that are senior to stock but junior to secured debt like mortgage bonds.
Junior Security: Financial instruments such as subordinated debt and equity that hold lower claim on assets and earnings compared to senior securities.
Subordinated Debt: Debt that is repaid after senior debt instruments in the event of liquidation and has higher risk.
Liquidation: The process of bringing a business to an end and distributing its assets to claimants, prioritizing senior claims.
Online References to Resources
- Investopedia - Senior Debt
- Corporate Finance Institute - Senior Debenture
- SEC.gov - Asset-Backed Securities
Suggested Books for Further Studies
- “Corporate Finance: The Core” by Jonathan Berk, Peter DeMarzo
- “Essentials of Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan
- “Financial Markets and Institutions” by Frederic S. Mishkin, Stanley G. Eakins
Fundamentals of Senior Security: Finance Basics Quiz
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