What is a Senior Security?

A senior security is a financial instrument that ranks higher than the other debt or equity instruments issued by an organization. The relative seniority of a security is of great importance when the issuer has gone bankrupt or is in liquidation; in these situations, the holders of the most senior securities are paid first, while the holders of the more junior securities are paid afterwards. Consequently, investors and lenders are more interested in acquiring senior securities, and so may accept a lower debt interest rate or higher equity purchase price in exchange for the increased safety of holding these instruments.

Examples of Senior Securities

Secured debt is classified as senior to unsecured debt, since the holders of secured debt are entitled to the assets assigned to the debt as collateral. There is no such collateral for unsecured debt. Preferred stock is classified as senior to common stock, since the holders of preferred stock are paid before the holders of common stock. A guaranteed bond can be considered a senior security, since repayment of it is guaranteed by a third party.