Unsecured bonds, also called debentures, are not backed by equipment, revenue, or mortgages on real estate. Instead, the issuer promises that they will be repaid. This promise is frequently called "full faith and credit."
Why issue unsecured bonds? Some companies do not have enough assets to collateralize. Other companies are established and are therefore trusted to repay their debts. As for governments, they can raise taxes if they need to pay off bondholders.
Unsecured bonds naturally carry more risk than secured bonds; consequently, they usually pay higher interest rates than do secured bonds. If a company issuing debentures liquidates, it pays holders of secured bonds first, then debenture-holders, and then owners of subordinated debentures.
Types of Unsecured Bonds >>