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Simple English definitions for legal terms
unsecured bond
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A quick definition of unsecured bond:
An unsecured bond is a type of loan that a company takes out, which is not backed by any specific asset. This means that if the company is unable to pay back the loan, the lender cannot take possession of any of the company's assets to recover their money. Instead, the lender relies on the company's reputation and creditworthiness to ensure that they will be paid back. Unsecured bonds are also known as debentures or plain bonds.
A more thorough explanation:
An unsecured bond, also known as a debenture, is a type of bond that is not backed by any specific asset or collateral. Instead, it is only secured by the general credit and financial reputation of the issuer.
For example, if a company issues unsecured bonds, investors who purchase these bonds are relying solely on the company's ability to pay back the debt based on its overall financial health and creditworthiness. If the company were to default on the bond, the investors would not have any specific assets to claim as collateral.
There are different types of debentures, including:
- Convertible debenture: a debenture that can be converted into another security, such as stock.
- Convertible subordinated debenture: a debenture that is subordinate to another debt but can be converted into a different security.
- Sinking-fund debenture: a debenture that is secured by periodic payments into a fund established to retire long-term debt.
- Subordinate debenture: a debenture that is subject to the prior payment of ordinary debentures and other indebtedness.
Overall, unsecured bonds are considered riskier than secured bonds because there is no specific collateral to back them up. However, they may offer higher yields to compensate for this added risk.