Question

What is the mechanism behind senior secured notes?

Answer 1

Senior secured notes are debt obligations backed by assets so that incase of default in interest payments the creditors can have legal rights on the assets. Since these secured notes are of senior nature the creditors will be paid off before paying off junior notes and share holders incase of Bankruptcy. Due to the relatively safe nature of this investment senior secured notes attract lowest returns and have no voting rights

Answer 2

Senior Securities are backed by assets WORTH MORE than the amount issued in senior notes. The difference in value is financed by JUNIOR NOTES holders. Since senior notes will be payed completely BEFORE junior notes start to be payed, they pose basically NO RISK. However, junior notes, since are taking the lion's share of the risk, also take the lion's share of the returns