What Exactly Is a Senior Security Officer?
Senior securities are those that are paid out first in the event of a company's bankruptcy or liquidation, whereas junior securities are those that are paid out after other security holders. Senior securities are typically regarded as the safest investment that a company can make because, in the event of a default, senior security holders will be paid any funds owed before investors in lower-ranking securities are paid.

Senior Security: What You Need to Know
With regard to the capital structure of a company, seniority refers to the order in which security holders are paid back in the event of a default by the corporation that issued the security. Because of the higher level of safety provided by a senior security, the returns on a senior security are typically lower than those on securities lower in the seniority hierarchy.

There is a specific seniority or repayment ranking for each type of security issued by a company, with holders of senior secured bond debt having the privilege of being paid first, before holders of other securities. Secured bonds, which are bonds that the issuer has backed with collateral, must be repaid before subordinated or junior bond debt can be repaid, and vice versa. Prior to common stockholders in terms of repayment priority, preferred stockholders have the right to demand repayment before bondholders.

Common stock, which is the least senior security in a company's capital structure, typically provides investors with the highest potential returns in order to compensate for the increased level of risk associated with holding common stock. Common shareholders have the ability to vote, whereas senior security holders do not have the ability to vote.

Bonds with a higher level of seniority

There are several general guidelines to follow when determining a security ranking.

Debt is paid out first, followed by equity, in the payout order.

Secured debt receives a higher credit rating than unsecured debt.

In terms of ranking, senior debt is higher than junior or subordinate debt.

There are several different kinds of bonds. The following is a breakdown of how each would rank in terms of seniority.

Secured bonds are the most secure and senior in terms of safety and seniority because they are backed or secured by real estate or other assets.

Senior Bonds: Anything that has the term "senior" attached to it indicates that it is ranked higher than junior or subordinate bonds.

Known as junior or subordinate bonds, these are bonds with a payout ranking lower than that of secured or senior bonds, and are issued by financial institutions. Junior bonds typically have slightly higher interest payments when compared to secured or senior bonds, which have a higher margin of safety due to their higher margin of safety.

Guaranteed or Insured Bonds: These are bonds that are insured or backed by a third party, such as an insurance company. While they can be considered relatively safe, it is the responsibility of the third party to step in and assume responsibility for the repayment of the bonds in the event that the issuing company defaults.

Common Stock Convertible Bonds: These securities give their owners the option to convert their bonds into shares of common stock at any time. Typically, if a company is experiencing financial difficulties, this is not a useful feature, as the bonds will only be paid out after all of the company's more senior securities have been paid in full.

Investing in Senior Bonds and Bond Funds

Consider the following scenario: an investor is interested in investing in a company. Purchasing stock is one method of accumulating wealth. When using this method, the investor has the ability to sell out of their position at any time, whether for a profit or for a loss. Common stockholders typically have voting rights, but if the company goes into default and the stock price plummets overnight, they will be the last to receive any funds that the company has left in its bank account.

Another alternative is to purchase preferred stock. As opposed to common stock, preferred stock does not have voting rights and has a much more stable market value because the price of preferred stock is determined by the company's ability to pay the preferred share dividend. The dividend represents the return on investment for the investor. Preferred shareholders are paid out first, followed by common shareholders, if any amounts are owed to them.

Generally speaking, the higher the maturity and safety of the investment, the lower the rate of return. In contrast, the higher the potential return, the more junior and risky the investment is considered to be.

In addition, the investor could purchase debt. Bonds and commercial paper are examples of this. When the paper or bond matures, the investor receives interest payments and/or a lump sum of money in exchange for his or her investment. Preferred shareholders are paid first, followed by the payment of interest and principal amounts to investors.

Another option is to use secured or senior debt. When investing in these securities, the investor still receives interest payments and a lump sum payment at maturity, but the interest rate is typically slightly lower than when investing in junior debt because senior debt is considered to be a safer investment. If the company experiences financial difficulties, secured bondholders will have access to the collateral that has been pledged as security against their bond. Generally, senior debt holders receive payment first, followed by junior debt holders and preferred shareholders, and finally common shareholders.

An investor can better assess what risk/reward combination they are most comfortable with by considering all of the available options.