Banking Exam Question - What is Subordinated Term Debt? What are the NRB Unified Directives About them? Explain

Introduction - Subordinated Term Debt

Subordinated debt is a loan or security that ranks below other loans and securities with regard to claims on a company's assets or earnings. Subordinated debt is also known as a junior security or subordinated loan. In finance, subordinated debt (also called  subordinated loan, subordinated bond, subordinated debenture or junior debt) is debt which ranks after other debts if a company falls into liquidation or bankruptcy. 

Subordinated obligation (also called subordinated loan, subordinated bond, subordinated debenture or junior obligation) is obligation which positions after different obligations if an organization falls into liquidation.

Such obligation is alluded to as 'subordinate', in light of the fact that the obligation suppliers (the banks) have subordinate status in relationship to the typical obligation. Since subordinated obligations are just repayable after different obligations have been paid, they are more hazardous for the moneylender of the cash. The obligations might be secured or unsecured. Subordinated advances commonly have a lower FICO score, and, in this way, a higher yield than senior obligation. 

A typical example for this would be when a promoter of a company invests money in the form of debt rather than in the form of stock. On account of liquidation (e.g. the company winds up its affairs and dissolves), the promoter would be paid just before investors — expecting there are advantages for disperse after every other risk and obligations have been paid.