Definition
A secured bond is a type of investment that is backed by collateral or assets in case the bond issuer defaults on the repayment. This collateral could be property, equipment, or other assets owned by the issuer. If the issuer can’t make the payment, the bondholders have the right to claim the secured assets to recoup their investments.
Key Takeaways
- A Secured Bond is a type of bond that is backed by specific tangible assets. If the issuer defaults, the bondholders have a legal right to these assets.
- Secured Bonds are generally considered less risky than unsecured bonds. This is because the collateral secures the repayment, hence they often offer lower yields than unsecured bonds.
- Types of assets used as collateral for Secured Bonds can vary, covering a wide range from Real Estate, equipment, cash, or even revenue from specific projects.
Importance
The finance term “Secured Bond” is important because it pertains to a safer form of investment for bond holders.
These are bonds backed by collateral, such as real estate, machinery or other physical assets that have value.
If the issuer defaults on their payments, the bondholders have a claim on the collateral.
This collateralized nature of a secured bond minimizes the risk involved for bondholders and often results in a lower yield than unsecured bonds from the same issuer.
Therefore, in the often uncertain landscape of investments, secured bonds represent a relatively reliable and less risky choice for investors to consider.
Explanation
Secured Bonds play a significant role in the world of corporate finance by providing a means for companies undergoing expansion or facing financial difficulties to raise capital. Such bonds are issued backed by the issuer’s collateral, which could be an asset or a revenue stream.
These assets attached to the bond provide greater assurance to the bondholders of redeeming their investments, as in case of any default by the issuer, these attached assets can be seized and sold to recover the money. In this way, Secured Bonds serve as a vehicle for businesses to access needed financial resources while, simultaneously, managing risk for their investors.
Moreover, from the investors’ perspective, Secured Bonds also offer an opportunity to venture into high-risk companies while enjoying a certain level of protection. Just like mortgage or auto loans, where the house or car itself serves as collateral, these bonds reduce the default risk for bondholders.
The presence of collateral not only ensure their principal amount but also promised interest payments. Therefore, the use of Secured Bonds helps achieve a balance in the creditors’ pursuit of high returns while safeguarding their invested capital.
Examples of Secured Bond
Mortgage Bonds: These are an excellent example of secured bonds. When a real estate or property company needs to raise capital, it can issue a mortgage bond. Investors who buy these bonds have a claim to the property in case the company defaults on its payments. For example, if General Electric issued a secured bond using one of their physical plants as collateral, this would be a mortgage secured bond.
Equipment Trust Certificates: This type of secured bond is common in the transportation industry. An airline, for example, might issue bonds to finance the purchase of new aircraft. The airplanes themselves become collateral for the bond. If the airline cannot meet its repayment obligations, bondholders can claim the planes.
Collateral Trust Bonds: A company might use these if it doesn’t have physical assets to offer as collateral but does have substantial financial assets. They will place securities such as stocks and bonds they own from other companies into a trust account that serves as a collateral for their bond issuance. For example, a corporation that owns shares of another company, non-transferable assets, or intellectual property may issue these types of bonds to raise funds.
FAQs for Secured Bond
What is a Secured Bond?
A Secured Bond is a type of bond that is backed by the issuer’s assets. If the issuer fails to repay the bond, the assets may be sold to repay bondholders.
How does a Secured Bond work?
A secured bond works by offering investors a degree of security. If the issuer goes bankrupt, the owners of secured bonds will be repaid from the sale of assets before unsecured bondholders and other creditors.
What are the advantages of a Secured Bond?
Secured Bonds tend to have lower interest rates because they are less risky to investors. The assets backing the bond give investors confidence that they will be repaid, even if the issuer defaults.
What are the disadvantages of a Secured Bond?
If the value of the underlying asset decreases, the level of security for the bondholder decreases as well. Also, in the case of a liquidation, secured bondholders may not receive the full value of the bond.
Are Secured Bonds safe?
While secured bonds are generally considered safer than unsecured bonds, they are not without risk. The safety of a secured bond heavily relies on the value and quality of the underlying asset.
Related Entrepreneurship Terms
- Collateral
- Debenture
- Credit Risk
- Asset-backed Securities
- Default Risk
Sources for More Information
- Investopedia: A comprehensive online resource for investing, finance, and market news.
- Corporate Finance Institute: An educational organization that provides online courses and materials for finance and investment professionals.
- Fidelity: An international provider of financial services and investment resources.
- Charles Schwab: A bank and brokerage firm providing services in banking, investing and financial guidance.
