AN OVERVIEW OF SECURED & UNSECURED CORPORATE BONDS
Posted by kenyantykoon on November 3, 2009
Yesterday, I did a post on corporate bonds and Wikipedia stated that there were two types of these bonds;
-secured and unsecured bonds
-senior and subordinated bonds
I will run through secured and unsecured bonds and the next post will deal with senior and subordinated bonds
Secured corporate debts are bonds that are backed up by the issuer’s (company giving out the bonds) physical assets. This means that if the company is not able to pay back the debts to investors, these assets are liquidated to pay them.
These assets are stocks and bond holdings, furnishings and/or real estate. Because of this backing, they are normally better investments that their unsecured counterparts.
According to wisegeek, secured bonds are not 100% safe investments but the risk is substantially reduced with the asset backing. For instance, let’s say that a secured bond is backed by a mortgage. This means that in the event of liquidation, the mortgage will be transferred to the new owner (the investor). But there is no guarantee that the mortgage itself will not default (there has been a lot of this in recent times) or if the underlying real estate will still be worth the value of the mortgage. But this is better than no backing at all. Wouldn’t you agree??
Needless to say, unsecured bonds are not at all backed by any physical assets but by the credit worthiness of the company issuing these bonds.
They are also called debentures so let this not confuse you 
The fact that this debt carries more risk to the investor means that it becomes more expensive for the issuer which is in terms of higher interest rates to the investor. But this is not to say that if the issuer goes bankrupt the unsecured creditor will not be paid. Far from it. He will be paid but after the secured creditors which means that they may get a smaller portion that the secured investors.
To understand this pay back scheme in the event of a bankruptcy, secured creditors are paid first and then the next group is the unsecured creditors, banks and financial institutions, insurance companies etc(the general creditors companies have). Finally preferred and common shareholders are paid last.
As the unsecured bonds have higher yield, they are more attractive to risk tolerant investors.
That is basically an overview of the secured and unsecured corporate bonds. There are other things that I have left out like the types of unsecured bonds and what not which I will cover later. This was just to familiarize green readers 
