Definition: A secured bond is a bond that requires the issuer to pledge specific assets as collateral in the case of default. Secured bonds are usually more popular with businesses or governments that are less likely to be able to pay their debts in the future. Interest on these bonds isn’t enough to attract investors. Companies and local governments will less than stellar past financial track records usually need to assure inventors that they will not default on their future principle and interest payments. And if they do default, ensure the investors don’t walk away empty handed.
What Does Secured Bond Mean?
Securing a bond does exactly this. The investors are guaranteed specific assets if the bond issuer can’t make its payments. This way the assets can be sold to pay off the liabilities to bond holders. In fact, in most cases the bondholders can demand the assets be sold if payments are missed.
Example
A good example of a local government that will probably need to issue secured bonds in the future is the city of Detroit. Since its 2013 bankruptcy, its difficult to believe an investor would want to put his or her money at risk purchasing a bond issued by the city of Detroit. I doubt it will ever be able to issue a bond without having some kind of secured collateral agreement attached to it.
The collateral agreement could include any assets the city owns. It could even include rights to public spaces like parking meters and garages. The rights to run parking meters are actually extremely valuable; however, most secured bonds include physical assets that can be sold readily at auction.
