Secured bond

Definition: A bond with the added assurance that, if the company does not make the required payments, holders may take a company asset and sell it to acquire the money needed to pay themselves what they’re owed.

Example: A company owns over $50 million in stock of several companies it partners with. It needs $25 million to build a new warehouse. It would prefer to not sell the shares in the companies it works with. Instead, it borrows the money by issuing $25 million in bonds secured by its investments in these companies. This way, the company will raise the money it needs without having to sell its investments. In addition, it will have an easier time attracting bond investors because it is willing to secure the bond. And, only in the unlikely case that the company couldn’t make the bond payments would its investments be sold.

Investeach explains: When an asset is offered to ensure payment, we say that it is pledged. The pledged asset is called collateral. If the bond-issuing company or government happens to pledge real estate (ie, land and/or a building), the secured bond can be more specifically called a *mortgage* bond. This term may be familiar because a mortgage loan is what a person takes from a bank in order to buy a home, which is real estate!

With an ordinary bond – formally known as a debenture – the bondholder can only rely on the “full faith and credit” (ie, reputation and good name) of the company or government which issued it. A holder of a secured bond can sleep better at night knowing that specific assets are pledged as collateral. On the downside, a bond with extra safety like this will pay less interest than an ordinary bond.

Finally, the asset(s) pledged as collateral will be identified in the indenture, the document containing all the legal terms and conditions of the bond.

Riddle me this:

1. How is a secured bond different than an ordinary bond?
2. What do we call the act of putting an asset forward to ensure that bondholders will be paid?
3. What do we call an asset that has been “put up” to ensure bondholders will be paid?
4. What can we more specifically call a bond that is secured by real estate?
5. What do holders of ordinary bonds have to rely to ensure they’ll be paid?
6. What is the downside for investors of investing in secured bonds?
7. Where can investors find the assets that have been pledged as collateral for a bond?