A junior security can be described as a security that has a lower priority claim than other securities with reference to the earnings or assets of its issuer.
For instance, common stock is classified as a junior security contrasted with corporate securities.
Consequently, if the issuing organization becomes insolvent, the bondholders will be compensated prior to the common stock investors.
At the point when bankruptcy happens, all investors in the organization will try to be compensated as much of their speculation as possible.
Notwithstanding, clear regulations are set up that decide the request where various sorts of investors are reimbursed.
At the highest priority on the rundown are the holders of senior securities.
Contingent upon the capital structure of the organization being referred to, the most senior securities may be bonds, debentures, bank credits, preferred stock, or other kinds of securities.
Nonetheless, in a normal capital structure, bondholders and different moneylenders are the first to be reimbursed, while regular investors are the lowest priority.
The explanation that a few sorts of securities get priority over others is on the grounds that not all securities have the same risk reward profile.
For example, corporate bondholders may hope to get an interest rate of 3.5% in the present market, whereas investors can theoretically obtain boundless upside potential as well as dividend payments.
Given the unobtrusive returns related with corporate securities, bondholders must be remunerated as lower risk.
They get this remuneration by being given priority over investors in the event that the organizations defaults.