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    Unsecured Bond: Why Issue Unsecured Bonds?

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    aeman hassan
    Unsecured bonds, also called debentures, are a type of debt security that is not backed by collateral from the issuer. They are a promise by the issuer to repay the debt and pay interest, relying solely on their credibility rather than assets. Unsecured bonds carry more risk than secured bonds but pay a higher interest rate as a result. Common types of unsecured bonds include treasury bonds, general obligation municipal bonds, income bonds that pay only after certain earnings are reached, and convertible bonds that allow conversion to equity. Key features of unsecured bonds are that they are documentary debt instruments paying fixed interest regardless of profits, with potential repayment or conversion options.

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    Unsecured Bond: Why Issue Unsecured Bonds?

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    aeman hassan
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    Unsecured bonds, also called debentures, are a type of debt security that is not backed by collateral from the issuer. They are a promise by the issuer to repay the debt and pay interest, relying solely on their credibility rather than assets. Unsecured bonds carry more risk than secured bonds but pay a higher interest rate as a result. Common types of unsecured bonds include treasury bonds, general obligation municipal bonds, income bonds that pay only after certain earnings are reached, and convertible bonds that allow conversion to equity. Key features of unsecured bonds are that they are documentary debt instruments paying fixed interest regardless of profits, with potential repayment or conversion options.

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    Financial Strategy Question

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    Aeman Hassan Cp

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    Unsecured bonds, also called debentures, are a type of debt security that is not backed by collateral from the issuer. They are a promise by the issuer to repay the debt and pay interest, relying solely on their credibility rather than assets. Unsecured bonds carry more risk than secured bonds but pay a higher interest rate as a result. Common types of unsecured bonds include treasury bonds, general obligation municipal bonds, income bonds that pay only after certain earnings are reached, and convertible bonds that allow conversion to equity. Key features of unsecured bonds are that they are documentary debt instruments paying fixed interest regardless of profits, with potential repayment or conversion options.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    39 views2 pages

    Unsecured Bond: Why Issue Unsecured Bonds?

    Uploaded by

    aeman hassan
    Unsecured bonds, also called debentures, are a type of debt security that is not backed by collateral from the issuer. They are a promise by the issuer to repay the debt and pay interest, relying solely on their credibility rather than assets. Unsecured bonds carry more risk than secured bonds but pay a higher interest rate as a result. Common types of unsecured bonds include treasury bonds, general obligation municipal bonds, income bonds that pay only after certain earnings are reached, and convertible bonds that allow conversion to equity. Key features of unsecured bonds are that they are documentary debt instruments paying fixed interest regardless of profits, with potential repayment or conversion options.

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    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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