Unsecured bond definition

What is an Unsecured Bond?

An unsecured bond is an obligation of an organization or government that is not backed by any assets. An unsecured bond is also not backed by the stream of cash flows from any revenue-generating operations. Instead, investors are relying upon the general creditworthiness of the issuer in deciding whether to purchase such a bond.

The Riskiness of Unsecured Bonds

If the interest on an unsecured bond or the bond itself is not paid by the issuer, purchasers of the bonds are clustered with general creditors in making claims for repayment. This can mean that investors will be paid substantially less than the amount they originally invested in the bonds, and at a much later date than expected. Given this extra risk, the interest rate that investors demand on unsecured bonds tends to be higher than the rate for secured bonds.

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Examples of Unsecured Bonds

Here are several examples of entities that may issue unsecured bonds:

  • No assets available. A corporate or government entity may sell unsecured bonds because it does not have a sufficient amount of assets to serve as collateral for the bonds. In this case, it will likely have to pay an unusually high interest rate in order to attract investors.

  • Highly-rated issuer. An issuer may be so large, profitable, and well-financed that investors are willing to do without the extra protection of a security feature.

  • Government issuer. A government may simply raise taxes if it needs additional funds to pay off its bond obligations, and so sees no need to issue secured bonds.

Terms Similar to Unsecured Bond

An unsecured bond is also called a debenture.

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