When a company defaults on its debt, would the 10 year bondholders be given preference to the 1 yearr bondholders while paying out money?

What is the order of preference?


In theory, the term of the bond does not affect the priority. It does not matter whether a "Junior Subordinated Debenture" is due in one year or sixty, it is still lower priority than a "Secured Note". On the other hand, if the "Secured Note" is secured by something that is not worth as much as the note, the excess is an unsecured debt.

In practice, the term of the bond has two effects:

  • Short term debt holders are more likely to get out just before the company goes broke. Sometimes their efforts to get out are exactly what causes the company to go broke! ("Commercial paper" is even more fickle than banks.)

  • All other things being equal, and depending on the terms of the loan, some bonds get priority over bonds of the same type that are issued later. For example, your first mortgage usually takes precedence over your second mortgage.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.