What Is a Parity Bond?

A parity bond refers to two or more bond issues with equal rights of
payment or equal seniority to one another. In other words, a parity bond is
an issued bond with equal rights to a claim as other bonds already issued.
For example, unsecured bonds have equal rights in that coupons may be
claimed without any particular bond having priority over another.
Therefore, unsecured bonds would be referred to as parity bonds with
each other. Similarly, secured bonds are parity bonds with other secured
bonds.

A parity bond is also referred to as a pari passu bond or a side-by-side

bond.

KEY TAKEAWAYS

 Parity bonds are sets of debt instruments that all have equal rights,
payment, and/or equivalent seniority. 
 Parity bonds come into play most often during bankruptcy
proceedings or in the event of default.
 Unsecured bonds from the same issuer are an example of parity
bonds since no one bond would have priority over another.

Understanding Parity Bonds

Parity bonds are similar to pari passu securities, which are securities or

debts which have equal claims on a right without any display of
preference. The term “pari passu” comes from Latin, and means equal
footing. For example, in a pari passu security, holders of common shares
all have equal rights to claim a dividend without one shareholder having
priority over another. 

A series of fixed-income securities may be issued as a parity bond, or

include a pari passu clause, in order to establish that it functions in the
same way as previously issued bonds.

Since an asset backs secured debts, they are often not fully equal to the
other obligations held by the borrower. Since there is no asset supporting
unsecured debts, there are greater instances of borrower default or
bankruptcy. Further, a provider of unsecured financing may enact clauses
that prevent a borrower from taking part in certain activities, such as the
promising of assets for another debt to keep a position with regard to
repayment.

Unsecured debts will have parity with respect to other unsecured debts,

meaning that the bonds have equal rights over the coupon. Secured debts
will also have parity with respect to other secured debts, although secured
debts will have rights that supersede those of unsecured debts. In other
words, guaranteed debts and unsecured debts are not parity bonds
concerning each other.

Example of a Parity Bond

Parity bonds have equal rights to the coupon or nominal yield. In fixed-
income investments, the coupon is the annual interest rate paid on a bond.
Consider a $1,000 bond with a 7 percent coupon rate. The bond will pay
$70 per year. If new bonds with a 5 percent coupon are issued as parity
bonds, the new bonds will pay $50 per year, but bondholders will have
equal rights to the coupon.

A parity bond stands in contrast to a junior lien or senior lien bond. A junior

lien bond, also called a subordinate bond, has a subordinate claim to
pledged revenue as compared to a senior lien bond, which is also called a
first lien bond. Unsecured debts are subordinate bonds compared to
secured debts.