Secured vs Unsecured Bonds: Key Differences Explained Simply

Introduction

Bonds can be classified in many ways, and one of the most common distinctions is between secured bonds and unsecured bonds. This classification depends on whether the bond is backed by a specific asset or simply by the issuer’s creditworthiness.

Understanding secured vs unsecured bonds, how they work, and how issuers structure them helps investors evaluate fixed-income instruments more clearly.

This article explains the difference between secured and unsecured bonds, how each structure works, and what investors may consider when analysing these categories.

What Are Secured Bonds?

A secured bond is a bond that is backed by specific assets or collateral.

If the issuer faces difficulty meeting obligations, the collateral can be used as outlined in the offer document.

Collateral may include:

• property

• receivables

• cash flows

• equipment

• financial assets

Because they are backed by a charge on assets, secured bonds follow specific rules under applicable regulations in India.

Secured Bonds in India: How They Work

In India, secured bonds typically involve:

• a charge on specific assets (movable or immovable),

• a trustee overseeing the security creation process,

• disclosures in the offer document explaining the nature of the security,

• and compliance with regulatory frameworks governing secured debt.

Key characteristics:

• The security offered is clearly described in the bond documentation.

• The nature of the charge—first charge, pari passu, etc.—is disclosed.

• Investors can refer to the offer document for details of the security pool.

• Secured bonds do not guarantee repayment; they simply outline the security available under specific circumstances.

Types of Collateral in Secured Bonds

Secured bonds may be backed by different forms of collateral, such as:

1. Fixed Assets

Buildings, land, machinery, or infrastructure.

2. Current Assets

Inventory, receivables, or short-term assets.

3. Financial Assets

Deposits, investments, or cash reserves.

4. Project Revenues

Cash flows associated with a project (as disclosed in the offer document).

The type of collateral depends on the issuer’s structure and regulatory requirements.

What Are Unsecured Bonds?

Unsecured bonds do not have specific collateral attached to them.

Instead, they are backed by:

• the issuer’s creditworthiness,

• financial strength,

• and repayment ability as outlined in the bond terms.

Unsecured bonds rely on the issuer’s capacity to meet obligations without tying repayment to specific assets.

How Unsecured Bonds Work

Unsecured bonds typically include:

• periodic coupon payments,

• a scheduled maturity date,

• issuer disclosures outlining financials and credit rating.

Because they do not have collateral backing, investors rely on publicly available financial and credit information to assess characteristics.

Unsecured bonds may be issued by companies, financial institutions, or other entities depending on the regulatory structure.

Secured vs Unsecured Bonds: Key Differences

Here are the core differences between secured and unsecured bonds:

1. Collateral

• Secured bonds: Backed by specific assets.

• Unsecured bonds: No collateral; backed by issuer credit.

2. Nature of Security

• Secured bonds have an asset-backed structure.

• Unsecured bonds rely on the issuer’s financial strength.

3. Documentation

• Secured bonds include details of charges and security creation.

• Unsecured bonds focus on issuer disclosures and credit information.

4. Recovery Structure (as per disclosed process)

• Secured bonds outline collateral usage as per regulations.

• Unsecured bonds follow processes defined for unsecured creditors.

5. Analytical Considerations

• Secured and unsecured bonds require different analytical approaches based on their structural frameworks.

• Understanding these distinctions helps investors study bond features more clearly.

Example: Comparing Structures

Secured Bond Example A company issues: Face value: ₹1,000 Maturity: 5 years Security: First charge on receivables This means the bond is backed by specific receivables as per the offer document. Unsecured Bond Example A company issues: Face value: ₹1,000 Maturity: 5 years No specific security Repayment depends on the company’s credit profile as disclosed. This example highlights the structural difference without implying performance.

Factors Investors May Evaluate

When reviewing secured and unsecured bonds, investors may consider:

1. Nature of Security (if any)

Type and quality of collateral (for secured bonds).

2. Credit Rating

Reflects the issuer’s creditworthiness.

3. Financial Disclosures

Issuer revenue, profit, leverage, and other financial information.

4. Tenure and Cash Flow Structure

Coupon frequency, maturity, and cash-flow design.

5. Callability or Other Features

Some bonds may include call or put features.

6. Regulatory and Legal Framework

How security creation or repayment is governed.

These factors support independent analysis of bond structures.

Yield Considerations Across Structures

Yield calculations for secured and unsecured bonds follow the same mathematical principles.

However, the inputs—coupon, price, maturity, and potential call features—may differ based on the structure.

Yield frameworks often include:

• Yield to maturity (YTM)

• Yield to call (YTC), if applicable

• Yield to worst (YTW)

These are analytical tools used for evaluating pricing and cash-flow behaviour.

Risks of Secured and Unsecured Bonds

Both secured and unsecured bonds come with risks including:

1. Credit Risk

Issuer’s repayment ability.

2. Interest Rate Risk

Bond prices may change as interest rates move.

3. Liquidity Risk

Secondary market availability may vary.

4. Structural Risk

Secured bonds: nature of collateral, quality of security.

Unsecured bonds: reliance on issuer credit.

5. Tenure Risk

Longer maturities may carry additional uncertainties.

Understanding these risks helps investors interpret bond features effectively.

How BondScanner Helps Investors Explore Bond Structures

BondScanner provides:

• issuer details

• security type (secured or unsecured)

• maturity profile

• coupon schedule

• credit rating

• disclosures from offer documents

These help investors compare bond characteristics and conduct independent research.

BondScanner does not provide recommendations but supports learning and analysis through structured information.

Conclusion

Secured and unsecured bonds differ primarily based on whether collateral backs the bond. Secured bonds include asset-backed security structures, while unsecured bonds rely on issuer credit strength.

Understanding the difference between secured and unsecured bonds helps investors analyse how various bond structures function and what characteristics they reflect.

Both types serve different purposes depending on the issuer’s framework and the bond’s design.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.