SECURED AND UNSECURED BONDS

Bonds may be secured or unsecured.

To be secured is to be backed by collateral.

The bond issuer must give this money or physical assets to investors if the bond defaults. A secured bond ensures the bondholder that the principal on the bond will be paid. Corporate bonds and municipal bonds may be secured or unsecured. Federal government bonds, however, are unsecured.

Unsecured bonds are called debentures.

Instead of securing them with some kind of collateral, the issuer "backs" them with its creditworthiness. Many consider the creditworthiness of the federal government to be the best there is. This is why U.S. Government securities are very popular among investors.