Sunday, July 5, 2009

Debenture bonds Vs. Guaranteed bonds

A debenture bond does not have any specific asset supporting the bond as collateral. The bondholders of debenture bonds have a standing equal to general creditors in the case of bankruptcy of the bond issuer.
Other types of bonds are guaranteed in that they have some sort of collateral related to the bonds. This way, if the issuer of the bonds fails to pay the bonds upon maturity, the holder of the bonds can obtain the collateral in settlement of the amount owed to them. Some of these types of bonds are;
Collateral bonds have a specific asset up as collateral. if the issuer defaults on the interest payment or the repayment of the principal, the bondholders can pursue legal action to obtain the collateral.
Guaranty bonds are guaranteed by a third party. for example, a parent company guarantees the bonds that are issued by a subsidiary. in the case of the default by the subsidiary, the parent company has guaranteed performance of the bonds.
collateral trust bonds are bonds that are supported by specific securities of the company. Mortgage bonds are backed by a specific asset and this asset is usually a fixed asset. Subordinated bonds (or junior bonds) are bonds that are supported by collateral, but they have a secondary claim on the collateral. So, if the collateral is not large enough to pay those parties with a primary interest in the property, holders of subordinated bonds will not receive anything from the collateral and will become general creditors.

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