Secured bond

A secured bond is a debt instrument that is backed by collateral. If the issuer defaults on bond payments, this means that title to the underlying assets will be passed to the bond holders. Examples of these assets are production equipment and real estate. The assets should have useful lives at least as long as the duration of the bonds, which is why real estate is a popular form of collateral for these types of bonds.

The term can also apply to a specific revenue stream from which bond payments are made. For example, bonds are sold to construct a toll road, and the revenue stream from subsequent toll payments is used to pay for bond interest and the eventual redemption of the bonds. The bond used in the example is also known as a revenue bond.

Because of the presence of collateral, investors are usually willing to accept a lower effective interest rate when they buy secured bonds. This can also work well for asset-intensive issuers that are not deeply in debt; they can simply assign certain assets to a bond in order to achieve a lower interest expense.

Secured bonds are most commonly issued by corporations and municipalities. They are not issued by the federal government.

Related Courses

Corporate Cash Management 
Corporate Finance 
Treasurer's Guidebook