What are the differences between Secured Bonds and Unsecured Bonds?
Secured Bonds: These bonds are backed by specific collateral provided by the issuer, such as assets or future cash flows. In case of default, bondholders have a claim on these pledged assets or income streams. This collateral provides a level of security for bondholders, reducing the risk of loss in the event of issuer default. During bankruptcy or liquidation, secured bondholders are prioritized in receiving repayments over unsecured bondholders due to their collateralized position.
Unsecured Bonds: These bonds are not backed by any collateral. If the issuer defaults, bondholders do not have a specific asset or income source to claim. Investors rely solely on the issuer's creditworthiness and trust when investing in unsecured bonds. They typically offer higher interest rates to compensate for the higher risk compared to secured bonds.
The distinction between secured and unsecured bonds significantly affects an investor's risk exposure and potential recovery in case of issuer default.
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