Unsecured bonds, known as debentures, are issued without any security to back them. Investors purchase unsecured bonds based on the creditworthiness of the issuing company. By contrast, some bonds are secured by the borrower's collateral or specified assets. These secured bonds are often referred to as mortgage bonds.
Secured vs Unsecured Bonds FAQs
Secured bonds are similar to mortgages. They are backed by the company's assets which are usually pledged to cover debt repayment in case of business failure. If the company becomes insolvent, secured bondholders have first priority at recovering their investment through liquidation or sale of collateral.
Unsecured bonds are issued without any collateral or security. Their repayment is based on the ability of the issuer to generate revenue and pay interest on schedule.
Secured bonds are backed by specific collateral which reduces the risk for investors. Unsecured bonds are backed by the creditworthiness of the issuer.
Unsecured bonds rely on the creditworthiness of issuing company while secured bonds rely on assets pledged to cover debt repayment in case of business failure.
An unsecured bond is more common than a secured bond since there is no need for any collateral.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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