Secured bond definition
/What is a Secured Bond?
A secured bond is a debt instrument that is backed by collateral. If the issuer defaults on bond payments, this means that title to the underlying assets will be passed to the bond holders. Examples of these assets are production equipment and real estate. The assets should have useful lives at least as long as the duration of the bonds, which is why real estate is a popular form of collateral for these types of bonds.
Secured bonds are most commonly issued by corporations and municipalities. They are not issued by the federal government.
Advantages of Secured Bonds
There are several advantages to issuing or investing in secured bonds. Because of the presence of collateral, investors are usually willing to accept a lower effective interest rate when they buy secured bonds. This can also work well for asset-intensive issuers that are not deeply in debt; they can simply assign certain assets to a bond in order to achieve a lower interest expense.
Revenue Bonds
The term can apply to a specific revenue stream from which bond payments are made. For example, bonds are sold to construct a toll road, and the revenue stream from subsequent toll payments is used to pay for bond interest and the eventual redemption of the bonds. The bond used in the example is also known as a revenue bond.
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Equipment Trust Certificates
A bond that is backed by an easily transportable asset is called an equipment trust certificate. Title to the underlying asset is held by a trust, which accepts payments from the issuer and passes them along to investors. Once the bond has been paid off, the trust transfers title to the equipment back to the issuer. This arrangement is most commonly used to generate the cash needed to acquire major assets.