Tier II bonds are a component of Tier 2 capital and are primarily for banks. These bonds are very similar to a loan. They don't give ownership or voting rights unlike stocks, but they do offer interest earnings to bondholders.

A bank’s capital structure is divided into three levels- Tier I, Tier II and Tier III. Tier I capital comprises the bank’s principal capital consisting of common stock and money from stock sales. Tier II capital comes under Tier I and is mostly made up of revaluation reserves i.e to give the bank backup in case of increase in value of company assets, general loss provisions and subordinated debts such as bonds- these bonds under the Tier II capital of a bank are known as Tier II bonds. These bonds are subordinate in nature to other debts because in the event of liquidation bondholders holding these bonds do not have first claim.

Features of Tier II bonds

These bonds have a maturity period of minimum 5 years and are subject to regular payments. Tier II bonds are issued as a part of asset-backed securities and as collateralized mortgage obligations i.e mortgages transformed into bonds to be sold to investors

Since they are a form of subordinated debt, tier two bonds are considered a riskier form of investment that must carry a higher rate of return. Investors run the risk of not collecting on their investment if the bank becomes insolvent because they have a secondary claim on assets