Tuesday, September 8, 2009

Mortgage Bonds

Debt securities representing a claim against specific assets (normally plant and equipment) owned by a corporation are known as mortgage bonds. These bonds may be either closed end or open end. Closed-end mortgage bonds do not permit the issuance of any additional debt. Against those assets already pledged under the mortgage. Open-end bonds, on the other hand, do allow additional debt to be issued against pledged assets, and this may dilute the position of the current bondholders. For this reason, open-end mortgage bonds typically carry higher yields than closed-end bonds. Sometimes several different mortgage bonds with varying priorities of claim will be issued against the same assets. For example, the initial issue of bonds against a corporation‘s fixed assets may be designated first mortgage bonds, and later, second mortgage bonds may be issued against those same assets. If the company were liquidated and the pledged assets sold, holders of second mortgage bonds would receive only those funds left over after holders of the first mortgage bonds were paid off.

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