How bonds are secured? How safe is investing in bonds? A bond is a form of obtaining a loan to the issuer in the capital market. As with any loan, regardless of the place where it is raised, it requires collateral. It is usually so that the bonds are released by institution (company) with a good reputation and which is known in the market. Its financial position is good. There isn’t here a form of direct protection (paper security). There is no specific guarantees beyond the reputation of the issuer. In this case, such bonds are not secured. Position of the issuer fulfills indirect warranty role. On the bond market, most bonds are not secured. Bonds that are not secured and free of additional guarantees are called debentures.The bonds of issuers whose position is not so good, and where there is a risk of non-repayment of bonds, have to be protected. Such a maneuver is executed to increase the attractiveness of a security by reducing the risk for the buyer. The security can be: assets of the issuer, the whole or its part. (In this case the issuer has a limited right to dispose of the assets of the whole property or a part of it. It takes long until all the bonds will be repaid. If the issuer has failed to fulfill its obligations, the bondholders have the right to seize and sell the whole or part of the assets of the issuer, to satisfy their claims).
The warranty of bonds.
Another operator guarantees the bonds of the issuer, i.e., takes on the responsibility for repayment of the bonds, if the issuer hasn’t had complied with his obligations. Obviously the guarantor himself must enjoy good reputation and financial position. The best guarantee is a guarantee of the State. It is worth mentioning that the treasury (state) bonds or guaranteed by the State are considered to be highly secure. Money of incapacitated persons and minors can be invested in such bonds.
Form of bonds – typical bond
The most common form of bonds consists of two parts: the “shell”, which contains the particulars of the loan, i.e. the name of the issuer, the face value of the loan, interest rate, maturity date, and in addition series and number of securities, its name. When regarding registered bonds – there’s also indication of the creditor,
coupon sheet, which is a set of coupons, using which you receive interest due. The consequence of this approach is that the longer the maturity of the bond, the more coupons are included. On a coupon sheet voucher is usually placed. Voucher is used to obtain a new coupon sheet at a time when the former was used. For order and security, as well as for the identification of interest payments, each coupon is marked by numbered series and the name of security. In addition, each coupon has its own sequence number. Also listed on the coupon are interest payment date and its amount.
It should be noted here that other types of bonds such as zero coupon or “registered” does not have a coupon sheet. Zero coupon bond because of its design does not require coupons. However, in case of registered bonds owner of the bond is registered, and interest shall be sent to the address indicated by the owner or account.