Secured Bond

What is a Secured Bond?

A secured bond is a type of bond in which the issuer of the bond provides a specific asset as collateral for the bond and offer reduced rate of interest rate compared to unsecured bonds. In case of default, the secured bondholders need not worry as the issuer is obligated to transfer the title of the collateralized asset to the bondholder. Mortgage-Backed Securities (MBS), Collateralised Debt Obligation (CDO) are some examples of secured bonds.

Secured Bond

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Types of Secured Bond

#1 – Mortgage Bonds

Mortgage bondsMortgage BondsA mortgage bond refers to a debt instrument backed by mortgaged assets such as equipment or real estate such as property, building, etc. It is a secured bond since the bondholders can recover their funds by selling the underlying collateral.read more are typically backed by real estate holdings or tangible property such as equipment. In case of default, the mortgage bondholders can sell off the underlying pledged property and get compensated for the invested amount—the ownership of the asset shifts to bondholders in case of default. As mortgage bonds are safer than corporate bondsCorporate BondsCorporate Bonds are fixed-income securities issued by companies that promise periodic fixed payments. These fixed payments are broken down into two parts: the coupon and the notional or face value.read more (no collateral), they have a lower rate of returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more.

#2 – Equipment Trust Certificate (ETC)

ETC refers to debt instrumentsDebt InstrumentsDebt instruments provide finance for the company's growth, investments, and future planning and agree to repay the same within the stipulated time. Long-term instruments include debentures, bonds, GDRs from foreign investors. Short-term instruments include working capital loans, short-term loans.read more that allow the issuing company to take possession and use the asset while paying the bondholders over the period of time. The ownership of the asset is, without a doubt, belongs to the bondholders, but the company can use and generate income out of it. Investors supply capital by buying certificates; in turn, helping firms buy assets and lease it to them for operations if the borrower can meet lenders’ payment requirements, the ownership is transferred to the borrower. In case of default, the lenders get to choose what needs to be done with the assets.

Firms need not pay property tax on an asset as they have just leased the same from investors and thus increase their profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more from operations. These types of debentures are usually seen in the airline and shipping industry (also with railway cars).

#3 – Secured Bonds by Municipalities

Municipalities can raise funds from investors through the issue of these types of secured bonds for a specific project. The bonds are backed by the anticipated revenue from that particular project. Upon disclosing the project’s details and anticipated revenue from the same, municipal bodies put front the repayment strategy or plan to the investors. Depending on the trust of investors in the projects, they can buy these types of bonds.

Advantages

Disadvantages

This has been a guide to what is a secured bond and its definition. Here we discuss its types along with the examples, advantages, and disadvantages. You can learn more about investment banking from the following articles –