Definition
A junior security refers to a type of financial instrument that has a lower priority claim on the assets and income of a company compared to a senior security. In the event of liquidation, senior security holders are paid first, and junior security holders are paid after the senior obligations have been satisfied. Essentially, junior securities rank lower in the hierarchy of claims.
Examples
-
Preferred Stock vs. Debenture: Preferred stock is a form of junior security compared to debentures. While preferred stockholders receive fixed dividends and have a higher claim on assets than common stockholders, they are still junior to debenture holders in the event of bankruptcy.
-
Debenture vs. Mortgage Bond: A debenture, which is an unsecured bond, is a junior security compared to a mortgage bond. Mortgage bonds are secured by specific assets, giving them a higher claim in the event of the company’s financial distress.
-
Common Stock: Common stock is the most junior of all corporate securities. Common stockholders have the last claim on the company’s assets and income, only after all other debt and preferred stock obligations have been met.
FAQs
What is a junior security?
A junior security is a financial instrument that has a lower claim to a company’s assets and earnings than senior securities.
How do junior securities differ from senior securities?
Junior securities have lower priority in claims on assets and income. Senior securities are paid first in case of liquidation, whereas junior securities are paid afterward.
What are some common types of junior securities?
Common types of junior securities include preferred stocks, debentures, and common stocks.
Which has a higher claim, preferred stock or common stock?
Preferred stock has a higher claim on assets and income than common stock.
What happens to junior security holders during liquidation?
Junior security holders are paid only after senior security holders’ claims are fully satisfied.
Is common stock considered a junior security?
Yes, common stock is the most junior security in a corporate structure.
Why might an investor choose to invest in junior securities?
Investors might choose junior securities for potentially higher returns due to their lower priority claim, which usually comes with higher risk and rewards.
Do junior securities have voting rights?
Common stocks, which are junior securities, typically come with voting rights. Preferred stocks, another type of junior security, usually do not.
Can junior securities be converted to senior securities?
Certain junior securities, such as convertible bonds, can sometimes be converted into another security type, potentially altering their seniority.
What is the risk associated with junior securities?
The primary risk is the lower priority claim on assets and income, making them riskier in the event of company distress or liquidation.
Related Terms
- Preferred Stock: A type of equity that provides a fixed dividend and has a higher claim on assets than common stock but is junior to debt securities.
- Debenture: An unsecured bond that relies on the creditworthiness of the issuer rather than specific assets as collateral.
- Mortgage Bond: A secured bond backed by assets such as real estate, giving it a higher claim than unsecured bonds.
- Common Stock: The most basic form of equity ownership with the lowest claim on assets and income after all other securities.
Online References
Suggested Books for Further Studies
- “Security Analysis” by Benjamin Graham and David L. Dodd
- “The Intelligent Investor” by Benjamin Graham
- “Investment Valuation: Tools and Techniques for Determining the Value of Any Asset” by Aswath Damodaran
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe
Fundamentals of Junior Security: Finance Basics Quiz
Thank you for enhancing your knowledge about Junior Security through this in-depth article and quiz. Keep challenging yourself to better understand the facets of financial instruments!
