Fixed Income Fundamentals: Asset or Collateral Backing

Collaterals are assets or financial guarantees underlying the debt obligation “above and beyond” the issuer’s promise to pay. Secured bonds are backed by assets or financial guarantees pledged to ensure debt repayments in the case of default. Unsecured bonds have no collateral. Senior debt is the debt that has a priority claim over junior debt.

Debentures are bonds that can be secured or unsecured. In many jurisdictions, debentures are unsecured bonds, with no collateral backing. If secured, debenture holders rank above unsecured holders.

Types of collateral backing includes:

• Collateral trust bonds by securities such as common shares or other financial assets;
• Equipment trust certificates by specific types of equipment or physical assets;
• Mortgage Backed Securities is a common form of collateral for securitized bonds (debt obligations represent claims to cash flows from pools of mortgage loans);
• Covered Bonds backed by a segregated pool of assets known as a “cover pool” (additional protection for bondholders)