Australian Bond Exchange

We continue our beginners series discussing the different types of bonds available. Bonds can be split into two main categories, Secured and Unsecured Bonds, each with different risk factors.

With a Secured Bond, the company issuing the bond is willing or forced by the lender to offer something with a market value as collateral making the Bond more secure in cases of default. Secured bonds are backed by property, inventory, manufacturing equipment or other assets owned by a company. Therefore, if the company defaults on the loan, the bond holders have a legal right to those assets.

Unsecured Bonds on the other hand are not backed by a specific asset and in case of liquidation rank behind the secured one making them somewhat riskier.

A Secured bond is usually worth more because the risk is reduced. Although not completely without any risks, it does however give Bond holders more security if the company goes bankrupt, there will be something of value that can be sold to repay the bond.

However, sometimes this can also be misleading as the lender (or bond holder) sometimes is more confident with the company’s reputation, credit risk and track record and therefore does not request extra security.