when a company declares bankruptcy or is liquidated all stakeholders in the company want to be repaid as much of their investment as possible but there are clear rules in place that determine the seniority of different securities this means that the order in which different types of stakeholders are repaid is predetermined where some are senior securities and others junior 
junior securities include those such as common stock as noted earlier these securities fall lower on the priority scale when it comes to repayment 1 senior securities end up at the top of the list and are considered the safest types of securities this allows holders of these securities to be paid before any others the most common types of senior securities are generally bonds debentures bank loans and preferred shares repayment depends on the company s capital structure in bankruptcy cases secured and unsecured creditors are paid from the company s assets before stockholders 2 bondholders and lenders of secured debt are typically repaid first cash is divided between senior securities before any junior holders are paid out in certain cases some common shares may get some money back while others may not be repaid at all 3there s a very good reason why some securities are prioritized over others not all securities have the same risk reward profile 4 for instance corporate bondholders may expect to receive an interest rate of 3 5 in today s market whereas shareholders can theoretically obtain unlimited upside potential and dividend payments bondholders must be compensated in the form of lower risk because of the modest returns associated with corporate bonds as such they are given priority over shareholders if the issuing company ever defaults the method of ordering asset repayment in the event of bankruptcy is known as the principle of absolute priority based on section 1129 b 2 of the u s bankruptcy code it is sometimes referred to as the principle of liquidation preference 56example of a junior securityhere s a hypothetical example to show how junior securities work let s say you own a manufacturing company called xyz industries to launch your company you raised 1 million from shareholders and took out a 500 000 mortgage to buy real estate for your factory you then secured a 500 000 line of credit from the bank to fund your working capital needs you see that you have maxed out your line of credit and have an outstanding balance of 350 000 on your mortgage after looking at your balance sheet after liquidating all of your equipment and other assets you raise a total of 900 000 you need to pay out your senior creditors first namely the bank that lent you the mortgage and the line of credit of the 900 000 you raised from selling your assets 350 000 pays off the mortgage and 500 000 goes to the line of credit the remaining 50 000 is distributed to your investors who are last in line because they invested in common shares which are junior security although this represents a very bitter 95 loss for your shareholders remember that if your business had been successful there is no upper limit to the return on investment roi they could have enjoyed that s the risk they assumed when they invested in your business 