Investments, tenth edition

  Subordination of Further Debt   

One of the factors determining bond safety is 

total outstanding debt of the issuer. If you bought a bond today, you would be understand-

ably distressed to see the firm tripling its outstanding debt tomorrow. Your bond would be 

riskier than it appeared when you bought it. To prevent 

firms from harming bondholders in this manner,    subordi-

nation clauses    restrict the amount of additional borrow-

ing. Additional debt might be required to be subordinated 

in priority to existing debt; that is, in the event of bank-

ruptcy,  

subordinated 

 or  

junior 

 debtholders will not be 

paid unless and until the prior senior debt is fully paid off.