Unsubordinated Debt
Candlefocus EditorThe most common type of unsubordinated debt is bonds. Bonds are issued by a government or corporation to finance long-term projects or other costs. Bondholders receive regular interest payments on their investment throughout the life of the bond, and then receive the full amount of the loan at maturity. While the issuer is obligated to repay the loan, bondholders typically have no rights to a company’s assets if it defaults.
Another type of unsubordinated debt is convertible debt. Convertible debt is a loan that can convert into equity. This provides lenders with the chance to convert their loan into stocks or shares in the company if the borrower cannot repay it. Investors typically require higher interest rates to accept convertible debt because of the added risk.
In general, unsubordinated debt is a less risky form of lending for investors because of the priority of repayment in the case of default. The interest rate offered may be lower than on subordinated debt, depending on the credit rating of the issuing company. However, in some cases, issuers may offer higher rates on unsubordinated debt instruments due to the added security for investors. In addition, the repayment terms are typically more flexible than with few other types of debt.
Because of the priority of payment and the added security, unsubordinated debt can be an attractive choice for investors looking for secured and long-term investments. It can be a useful option for companies that need financing but do not have the credit rating to secure a loan from a traditional lender. As such, it is an important option for businesses to consider when entering into borrowing arrangements.