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Mortgage bonds have company real estate assigned as collateral on the bondholder's investment, which gives them the highest priority among all claims on assets pledged as collateral. Even if the corporation's equipment is destroyed and all it's outside investments fail, the company's property still retains value and this can be used to repay bondholders. A trustee acting on behalf of bondholders holds the collateral, and if a company defaults or goes bankrupt, the trustee may foreclose for the bondholders.
Mortgage bonds are sometimes issued on the company's real estate holdings in general, sometimes on a specific portion of the company's real estate only. Sometimes several classes of a single bond are issued. If the company defaults in this case, then the first claim on the pledged property goes to first-mortgage bonds, second claim to second-mortgage bonds and so on.
While mortgage bonds are generally considered the safest kind of corporate bond, individual bonds are only as secure as the assets that secure them, and are rated accordingly.
Mortgage bonds may be issued in three different ways, as closed-end trust indentures, open-end trust indentures, and prior lien bonds. The terms in which a bond is issued can indicate a corporation's financial condition.
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