Why do investors who buy subordinated debentures usually receive higher interest rates than other bondholders?

Investors who buy subordinated debentures receive higher interest rates than other bondholders primarily because subordinated debentures are lower in the capital structure and thus carry a higher risk. In the event of liquidation, subordinated debenture holders are paid after senior debt holders, increasing the likelihood that they may not receive their full investment back. This increased risk compensates investors with higher returns to attract them to these more precarious investments. As a result, the higher interest rates reflect both the risk and the potential for greater rewards associated with subordinated debentures.