Secured versus unsecured bonds, Financial Management

Along the dimension of security, bonds can be classified into unsecured (straight) bonds and secured (mortgage) bonds. Unsecured bonds have no charge on any specific assets of the company while secured bonds carry a fixed or floating charge on the assets of the company.

The distinction between secured and unsecured bonds becomes relevant in case the issuer defaults in the payment of interest or principal. The secured bondholders are entitled to take possession of the security given to them and realize their dues by selling these assets (typically land, building, machinery, etc.). This right is valuable to the bondholders provided the security is worthy, easily saleable and has not been simultaneously given as security to other creditors as well. All these factors have to be examined while evaluating a secured bond. Unsecured bonds are not backed by any such security, but the bondholders need not worry about this if they believe that the company is financially very sound and is unlikely to default.

Posted Date: 9/8/2012 4:26:41 AM | Location : United States







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