Which of the following definitions describes a secured bond?
Multiple Choice
Secured only by the “full faith and credit” of the issuing corporation.
Supported by specific assets pledged as collateral by the issuer.
Matures in installments.
Matures on a single date.
The Correct Answer and Explanation is :
The correct answer is:
Supported by specific assets pledged as collateral by the issuer.
Explanation:
A secured bond is a type of bond that is backed by specific assets pledged by the issuer as collateral. This means that if the issuer defaults on the bond, the bondholders have the right to seize the pledged assets to recover the debt. These bonds are considered less risky for investors compared to unsecured bonds, as they have a form of security in case the issuer fails to make payments.
To understand this better, here is a breakdown of the options:
- Secured only by the “full faith and credit” of the issuing corporation.
This description refers to unsecured bonds, not secured ones. Unsecured bonds, also known as debentures, are not backed by specific assets but rather by the issuer’s overall creditworthiness. These bonds rely on the issuer’s promise to pay and are often considered riskier than secured bonds. - Supported by specific assets pledged as collateral by the issuer.
This is the correct definition of a secured bond. For example, a corporation may issue a bond that is secured by physical assets, such as property, machinery, or accounts receivable. If the issuer defaults, bondholders can claim these assets to recover their investment. - Matures in installments.
This description refers to serial bonds or bonds that have a series of maturity dates, rather than a single maturity date. These are not necessarily secured bonds, as they could be either secured or unsecured. - Matures on a single date.
This option refers to term bonds, which mature on a single date, and this type of bond could be either secured or unsecured. The maturity date does not determine whether the bond is secured; the presence of collateral does.
In conclusion, a secured bond is specifically backed by pledged collateral, offering bondholders a form of protection if the issuer defaults.