Investing Assets & Markets Bonds What Is a Senior Note? By Robin Hartill Updated on January 28, 2022 Reviewed by Anthony Battle In This Article View All In This Article Definition and Examples of a Senior Note How a Senior Note Works What It Means for Individual Investors Photo: Drakula & Co. / Getty Images Definition A senior note is a type of bond that gives an investor a higher-priority claim compared to junior notes when a company files bankruptcy. Senior notes pay lower interest rates than junior notes but are repaid before other debts when a company defaults. Key Takeaways A senior note is a type of corporate bond that carries a higher-priority claim in bankruptcy than a junior note, which means those who own senior notes get repaid first.Senior notes are typically unsecured debt; they aren’t secured by collateral.Because senior notes have less risk than junior bonds, they typically pay lower interest rates, but that doesn’t mean they’re risk-free. Definition and Examples of a Senior Note A senior note is a type of corporate bond that gives the bondholder a higher priority claim on a company’s assets and cash flows in bankruptcy than a bondholder who owns a junior note. To understand senior notes, you need to understand the basics of corporate bonds. When a company needs to raise cash, it often does so by issuing corporate bonds. Investors receive regular interest payments, plus the return of their principal when the bond reaches maturity. But in a corporate default, bondholders will take their place in line with the company’s other creditors seeking to get paid in bankruptcy. Some senior notes may be convertible. This means the senior note could be converted into shares of company stock, giving you the chance to own equity in the company. Note During bankruptcy proceedings, bondholders stop receiving interest payments and shareholders don’t receive dividend payments. Senior Notes vs. Senior Debt Though the terms “senior debt” and “senior notes” are often used interchangeably, the terms have different meanings. Senior debt typically refers to secured debt, which is backed by collateral, such as a building or equipment. Both senior notes and junior notes typically aren’t backed by collateral, meaning they’re considered unsecured debt. Sometimes, they’re referred to as senior or junior debentures. How a Senior Note Works Different types of senior notes reach maturity at different times. It may take up to 10 years for a note to reach maturity. Sorting out the order in which creditors get paid during bankruptcy proceedings is extremely complex. However, creditor claims are typically paid in the following order: Secured creditors: Secured creditors, typically banks, are paid first during corporate bankruptcy. Unsecured creditors: This category includes banks holding debt that’s not backed by collateral, suppliers, and bonds. Stockholders: Investors who own stock in a bankrupt company get paid last during bankruptcy liquidation. Two types of shareholders are common and preferred stock shareholders. Shareholders may be left with nothing if secured and unsecured creditors aren’t paid in full. Also, it is important to note that preferred shareholders get paid before common stock shareholders. Within each category, there are complicated hierarchies. For example, suppliers, customers, and pensioners are all considered unsecured creditors. Banks can also hold debt that’s not backed by collateral. These debts may take equal or higher priority over the claims of bond investors who hold senior notes. Senior notes are more likely to be repaid than junior notes, so they’re considered lower risk. Because there’s less risk involved, senior notes pay lower interest than junior notes. However, there’s no guarantee that you’ll be paid cash. Companies may choose to repay bondholders in stock instead. It depends on the bankruptcy and situation. Note High-yield bonds, also known as junk bonds, offer higher interest payments because their risk of default is higher. Ratings agencies Moody’s, Standard & Poor’s, and Fitch grade bonds according to their creditworthiness. A bond is considered a junk bond if it has less than a Ba1 rating (non-investment grade) from Moody’s or lower than a BB+ rating from Standard & Poor’s or Fitch. What It Means for Individual Investors Investing in senior notes poses less risk compared to junior notes or stocks, but it isn’t risk-free. During bankruptcy, investors in senior notes get paid only after secured creditors’ claims have been paid, and other creditors may have higher-priority claims. If you’re concerned about default, investing in senior notes of just one or two companies may not be enough to mitigate the risks. By investing in a bond fund, you could invest in hundreds or even thousands of bonds. In doing so, you may reduce your risk because you’re spreading it out. Also, default risk isn’t the only type of risk to consider when you invest in any type of bond. Other risks to consider, whether you’re investing in senior notes or junior notes, include: Interest rate risk: Because bond prices typically have an inverse relationship with interest rates, there’s the risk that the bond’s market value will drop as interest rates rise. Inflation risk: A bond’s total return may not keep up with inflation. Market risk: A bond’s price could be volatile due to market conditions. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. SEC Office of Investor Education and Advocacy. "What Are Corporate Bonds?" NC State University. "1 Financial Instruments." U.S. Securities and Exchange Commission. "Bankruptcy: What Happens When Public Companies Go Bankrupt." Fidelity. "When Bonds Go Bad." Fidelity. "Bond Ratings." Merrill Edge. "Understanding Bonds and Their Risks."