Which of the following characteristics defines a secured bond?

Which of the following characteristics defines a secured bond?

• A. It is backed by the issuer's general creditworthiness
• B. It is protected by specific assets of the issuer
• C. It has lower interest rates compared to unsecured bonds
• D. It does not pay interest until maturity

Answer: (B)

A secured bond is defined by its protection through specific assets of the issuer, which means that in the event of default, bondholders have a claim on those specific assets. This linked asset backing enhances the security of the bond, making it less risky for investors compared to unsecured bonds, which rely solely on the issuer’s promise to pay. The presence of these specific assets not only adds a layer of protection for investors but also typically results in a lower yield compared to unsecured debt since the perceived risk is lower. However, this characteristic of asset backing stands out as the definitive trait of secured bonds, distinguishing them in the investment landscape.

A secured bond is defined by its protection through specific assets of the issuer, which means that in the event of default, bondholders have a claim on those specific assets. This linked asset backing enhances the security of the bond, making it less risky for investors compared to unsecured bonds, which rely solely on the issuer’s promise to pay.

The presence of these specific assets not only adds a layer of protection for investors but also typically results in a lower yield compared to unsecured debt since the perceived risk is lower. However, this characteristic of asset backing stands out as the definitive trait of secured bonds, distinguishing them in the investment landscape.