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What is a Junior Debenture? A Comprehensive Legal Overview
Definition & meaning
A junior debenture is a type of bond that is repaid only after senior debentures have been settled in the event of the issuer's financial distress. It is typically issued by manufacturing or industrial corporations and is supported by the issuer's overall creditworthiness. Unlike secured bonds, a junior debenture does not create a lien on the corporation's assets, meaning it is not backed by specific property. In the case of liquidation, junior debentures have a claim on assets that are not specifically pledged to senior debt holders once their claims are fulfilled.
Table of content
Legal use & context
Junior debentures are commonly used in corporate finance and investment contexts. They are relevant in areas such as securities law and bankruptcy law. Investors often encounter junior debentures when assessing the risk and return profile of their investment portfolios. Users can manage related legal documents, such as bond agreements or investment contracts, using templates available from US Legal Forms.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A manufacturing company issues junior debentures to raise capital for expansion. If the company faces financial difficulties, it must first pay off its senior debentures before addressing the junior debenture holders.
Example 2: An industrial corporation goes bankrupt, and its assets are liquidated. The proceeds from the sale of assets are first used to satisfy the claims of senior debenture holders, with any remaining funds available to junior debenture holders. (hypothetical example)
Comparison with related terms
Term
Definition
Key Differences
Senior Debenture
A bond that is repaid before junior debentures in case of liquidation.
Senior debentures have priority over junior debentures.
Secured Bond
A bond backed by specific assets of the issuer.
Secured bonds have a lien on specific assets, while junior debentures do not.
General Obligation Bond
A bond backed by the full faith and credit of the issuer.
Junior debentures are a type of general obligation bond but lack specific asset backing.
Common misunderstandings
What to do if this term applies to you
If you are considering investing in junior debentures or are involved in a situation where they are relevant, it is advisable to conduct thorough research or consult with a financial advisor. You can also explore US Legal Forms for templates related to bond agreements and investment documents. If the situation is complex, seeking professional legal assistance may be necessary.
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