|Course 107: Secured and Unsecured Bonds|
|Identifying Secured Bonds|
Mortgage bonds are secured corporate bonds that are backed primarily by real estate, although they may include other corporate assets as well. They may cover all mortgageable property or just specific pieces.
Because mortgage bond collateral provides a clear claim on a company's assets, mortgage bonds are considered high-grade and safe from default. A trustee acting on behalf of bondholders holds the collateral; if the bond defaults, this trustee may foreclose for the bondholders.
Mortgage bonds may be either first mortgage bonds or junior mortgage bonds. Should an issuer have to liquidate, first mortgage bonds are paid off before juniors are.
To finance projects such as bridges, hospitals, and power plants, municipalities sell revenue bonds (or limited obligation bonds). The anticipated revenue generated by those projects is used to secure them.
Because they are backed with specific collateral, secured bonds are perceived as safer investments than unsecured bonds. Financial assets in the form of a securities portfolio containing stocks and bonds secure collateral trust bonds. A third-party trustee holds the securities.
Equipment trust certificates are backed by company equipment such as trucks, airplanes, railroad cars, etc. They are often issued by airlines and railroads that need to finance new purchases of equipment. The equipment bought may be the same equipment that is collateralized. A trustee for the bondholders keeps the title to the equipment. After all the bondholders have been repaid, the trustee then returns the title to the company.
Because they are backed with specific collateral, secured bonds are perceived as safer investments than unsecured bonds. Because they are perceived as safer, they typically pay lower interest rates. Secured bonds are favored by those who want to protect their investment capital.
Next: Unsecured Bonds >>
|Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.|
If you have questions or comments please contact Morningstar.