Subordinated debenture is an unsecured loan to the issuer that has a junior claim on the issuer’s assets in the event of default relative to the straight debenture. Should the issuer default, the holders of the debentures will be paid before the holders of the subordinate debentures will be paid anything.
Applying "Subordinated Debenture" to Securities Exams:
There are various types of unsecured debt that may be issued by a corporation. Unsecured debt is only backed by the issuer’s good faith and promise to pay. In the event that the company files bankruptcy or defaults on its debt the holders of subordinated debentures have a lower claim on the assets of the corporation than the holders of straight debentures. Subordinated debentures carry a higher degree of risk than straight debentures, as such the interest rate on the subordinated debenture is higher than those of the other debentures issued by the same company.