A corporation that issues secured bonds guarantees that specific assets are set aside to act as collateral in the event of bond default or company bankruptcy. Secured bonds are also sometimes called asset-backed bonds.
Secured bonds represent a significantly less risky investment for bondholders than unsecured bonds. In the event of a bond default, holders of secured bonds are entitled to seize the assets that were designated as collateral. If the issuer suffers bankruptcy, holders of secured bonds have high priority among the list of those who have claims on the company's assets.
Because of the relatively low risk of this investment, the interest payments on secured bonds are generally lower than interest payments on unsecured bonds. With less risk comes less reward. But the greater security and peace of mind that comes with collateral backing makes secured bonds a worthwhile investment for older investors, and those who want the assurance that their principal is safe and sound, generating reliable income.
But secured bonds are only as secure as the company that issues them. Secured bonds issued by a company on unsure financial footing can be significantly more risky than unsecured bonds issued by successful and well-established corporations. These factors are usually taken into consideration by the services that rate bonds, but it's important to keep them in mind, especially when considering smaller issues that might not receive attention from mainstream rating agencies like Standard & Poors and Moody's.
There are three primary kinds of secured bonds, mortgage bonds, collateral trust bonds and equipment-trust bonds.