Secured Bonds

Secured bonds are a form of debt that is secured by some form of collateral such as a building or equipment. If a company fails to meet the requirements of a bond, a trustee named in the indenture will sell the collateral or assets and use the proceeds from the sale to pay bondholders. This form of bond will often receive a higher bond rating because risk has been reduced due to the collateral backing the bond. The higher rating allows for a lower interest rate to be offered on the bonds, however, companies are potentially forfeiting assets if they fail to make bond payments.

Three main types of bonds are regularly sold: Equipment Trust Certificate (ETC), Collateral Trust Certificate (CTC), and Mortgage bonds.

Equipment Trust Certificates. When a company purchases equipment the funds to purchase the equipment might not be readily available, so a company might issue Equipment trust certificates. The equipment purchased is the same collateral backing this type of bond.

Collateral Trust Certificates. A company may issue CTCs when the only collateral a company has or is willing to pledge is negotiable securities. Often times pledged securities to back CTCs are issued by the subsidiaries of an issuer.

Mortgage Bonds. Both first mortgage bonds and second mortgage bonds can be issued on a company's real estate holdings. If a bond issuer could not meet bond obligations, the real estate holdings would be sold and second mortgage bond holders would be paid following first mortgage bond holders.


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