by Calvin Ng.

Created on: September 26, 2007

There are two main sectors in the economy: public and private sectors.The private sector consists of profit and non-profit businesses.The non-profit is just a very minor compare to the profit part of the private sector and rarely issuing bonds to finance its operation.Therefore,this article will mainly focus on bonds issued by for-profit companies.Generally,when a company needs money to finance its business it raises capital by issuing stocks and/or bonds;when it needs a short term cash,like money to improve cash flow,it issues commercial papers or simply a bank loan or credit line.Thus,companies usually issue bonds for its long term need of fund and a corporate bond is a legal debt contract which obligates the corporation to pay periodic interest and repay the principal at maturity to the bondholders.

Corporate bonds can be classified into secured and unsecured bonds.Secured bonds are debts backed by tangible assets such as real estate or equipments.Unsecured bonds are debts simply backed by the corporation's promise to pay.For this nature most unsecured bonds are rated speculative by rating companies.

Secured bonds are termed depending on the source which is pledged as collateral for the issue.If real estate is pledged then the bond is termed as mortgage bond,if equipments are pledged then it is termed "Equipment Trust Certificate",if marketable securities are pledged then it is termed "Collateral Trust Certificate."

Secured bonds are highly rated because the bondholders have the lien on the pledged assets;that is,if the corporation defaults or bankrupts,bondholders have a legal right to sell those assets to get back their money.

The real estate used to collateral mortgage bonds may include land and associated proved reserves,buildings and physical infrastructure,factory.Mortgage bonds may divided into senior or junior lien status.When a corporation issues mortgage bonds the first time it is called senior mortgage bonds and when it issues bonds of the same asset back the second and third times these bonds are called junior mortgage bonds.Senior bonds are paid first if pledged assets are liquidated; so,they are rated higher than junior.

Unsecured bonds commonly termed as "debenture" are non-collateral debts.They are not always rated junk,some large strong companies also issue debentures which are highly rated due to the company's high credit rating.Like senior and junior status in mortgage bonds,debentures of secondary offerings are termed subordinated debentures

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