WHY BE SUBORDINATED?
Published 28/11/2010 | 05:00
Why would someone lend as a subordinated bondholder rather than a senior bondholder?
The interest bondholders are paid reflects the level of risk they are taking when investing in businesses. Bondholders of blue-chip or AAA-rated businesses get a lower rate of interest than lenders to new companies in high-risk areas like pharmaceuticals, for instance.
Similarly, subordinated bondholders are paid a premium to reflect the greater risk they bear in the event that the company or business in which they invest in fails.