Section 3.5 – Corporate Bonds: Secured and Unsecured

Key Concepts
- Secured vs. Unsecured Debt:
  - Secured debt: Backed by collateral (specific assets of the corporation).
  - Unsecured debt: Backed only by the issuer’s promise or “full faith and credit.”

Backed by securities (like stocks or Treasuries) held in a trust account that cannot be touched except to secure the loan.

💡 Because secured bonds have assets behind them, they generally have lower yields (less risk).

Debentures: The most common type of unsecured bond. Based on issuer’s credit and reputation.

Guaranteed Bonds:
- Backed by the issuer, but also supported by a third party (often a parent company).
- Still considered unsecured.
Income (Adjustment) Bonds:
- Pay interest only when the company has sufficient income and the board approves it.
- Unreliable for income-seeking investors.
Subordinated Debentures:
- Lower priority than other debentures in case of liquidation.
- Offer higher coupon rates to compensate for the risk.

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Secured Debt Holders – paid first from sale of collateral.
Unsecured Debt Holders & General Creditors – suppliers, service providers, etc.
Subordinated Debt Holders – lower priority, higher risk.
Preferred Stockholders – equity holders, below all creditors.
Common Stockholders – last in line.
➡️ Debt always has priority over equity.
Administrative Claimants:
Attorneys, courts, appraisers, and liquidators assisting in bankruptcy are paid after secured creditors but before unsecured debt.

An unsecured corporate bond backed by the company’s financial strength.
Income (adjustment) bond.
A lower-priority unsecured bond with a higher coupon rate to offset greater risk.