Secured Bonds - Research Paper Example

Secured Bonds Secured Bonds Some bonds are ified as “secured” when it is “backed by a collateral such as a mortgage or lien, the title of which will be transferred to the bondholders in case of default” (WebFinance, Inc., 2011). There are different types of secured bonds and the most common form are mortgage bonds which are backed by real estate or physical equipment that may be liquidated. These bond are perceived to have very little risk; thus, being high-grade bonds (WebFinance, Inc., 2011). Another form of a secured bond is the equipment trust certificates.

The collateral for equipment trust certificates are company equipment such as trucks, airplanes and railroad cars (Morningstar, Inc., 2010). These certificates are often issued by airlines and railroads to finance the purchase of new equipment. The equipment purchased may also be the collateral used for the bond. A trustee is assigned to keep the title for the bondholders. Upon repayment of the bond, the title is then returned to the company who issued the bond (Morningstar, Inc., 2010).

Bonds issued at a premium means that the price of the bond is sold for more than the face value (Financescholar, n.d.). On the other hand, a bond issued at a discount means that the bond is sold for less than its face value. The decision whether to issue a bond at a discount or at a premium is often based on the expected coupon rate. “A callable bond is one in which the company can require the bondholder to sell the bond back to the company” (InvestorGuide, 2011). Callable bonds are attractive to companies because if they are paying higher coupon rates than current market interest rates, they have the option to buy back the bonds and can therefore save on interest payments.

They can choose to reissue the bonds at a lower coupon rate. Another reason why companies find callable bonds attractive is because when their credit rating is raised, they will be in a position to raise funds at a much lower cost than what they previously committed to bondholders. Works CitedFinancescholar. (n.d.). Bonds valuation and interest rates - premium or discount bonds. Retrieved August 8, 2011, from financescholar.com: http://www.financescholar.com/bond-debt-securities.htmlInvestorGuide. (2011). Advanced bond concepts.

Retrieved August 8, 2011, from investorguide.com: http://www.investorguide.com/igu-article-573-bonds-advanced-bond- concepts.htmlMorningstar, Inc. (2010). Identifying secured bonds. Retrieved August 8, 2011, from news.morningstar.com: http://news.morningstar.com/classroom2/course.asp?docId=5404&page=2&CN=COMWebFinance, Inc. (2011). Secured bond. Retrieved August 8, 2011, from investorwords.com: http://www.investorwords.com/4435/secured_bond.html