Unsecured bond

Definition
Unsecured bond is defined as the capability of a customer to obtain goods and facilities before
payment, with the belief that the payment will be done in the near future. Unsecured bonds are
also called debentures, and they are not backed by revenue, equipment or any mortgages on real
estate. Instead, a promise is made by the issuer that they will be repaid. This promise is called
‘full faith and credit’. It can also be defined as a type of debt certificate which requires a fixed
rate of interest or annual sum till maturity.

Why issue unsecured bonds?

Normally, some of the companies do not have many assets with themselves to collateralize.
Whereas other companies are established and hence trusted to repay their debts. In case of
governments, they can always increase their taxes if they need to pay their shareholders.
Unsecured bonds, in general, carry a higher risk than the secured bonds. As a result, unsecured
bonds pay a higher rate of interest than the secured bonds. If a company that issues debentures
liquidates, then it pays the holders of the secured bonds first, then the debenture holders and
lastly the owners of the subordinated debentures.

Types of unsecured bonds

The various types of unsecured bonds are:
1. Treasury bonds 
It is a debt instrument with a maturity of 10 years or longer. These types of bonds are
considered very safe in terms of default and are very much popular among the investors.
2. General obligation bonds 
These are also called municipal bonds without backing. The only security, that one
delivers is the credit worthiness of the issuing city or state. These bonds also finance
municipal operations.
3. Income bonds 
In this type of bonds, the payments are made only after a certain amount of income is
earned by the issuer. The investor may be willing to invest in this type of bond only if the
coupon rate is attractive, or there is a high yield to maturity as he is aware of the risks
involved.
4. Convertible bonds
These types of bonds give the option to an investor to convert the bonds into shares of
common stock. At the time when the bonds are issued, the conditions, price and the time
frame must all be set down.
Features:

A debenture typically carries the following features: it is also call unsecured bonds

1) Debentures are nothing but documents. In other words, they possess documentary value.

2) These documents are evidence of debt. This shows that the company owes a debt to the
debenture-holder.

3) The interest on debentures is always payable at a fixed rate. Further, the company has to
pay interest regardless of whether it makes profits or not.

4) The company may either repay the debt or even convert the debenture into shares or other
debentures.

5) Debentures may or may not carry a charge on the company’s assets.

6) Finally, debentures are generally transferable. Debenture-holders can sell them on stock
exchanges at any price.

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