What is a characteristic of senior debt?

Senior debt is characterized by its priority in the capital structure of a company, particularly in the event of bankruptcy or liquidation. This means that senior debt holders are the first to be compensated before any other creditors or equity holders. This prioritization is a key attribute that makes senior debt less risky compared to subordinate or junior debt, and it typically offers lower interest rates as compensation for this reduced risk.

Understanding senior debt also involves recognizing the implications of its seniority. In case of financial distress, the increased likelihood of repayment enhances the appeal of senior debt to investors, who prioritize capital preservation. The structure is an essential aspect of corporate financing and helps companies manage their capital efficiently while providing security to lenders.

The other options do not accurately reflect the unique characteristics of senior debt: while some debt instruments may require only interest payments, this is not a defining feature of senior debt; not all senior debt carries the highest interest rates as it is often associated with lower risk; and, of course, senior debt is defined as a type of liability, not equity.