Every bonds issued is either secured or unsecured. A secured bond is backed by specific assets of the borrower, which can be sold to repay the lender if the borrower, which can be sold to repay the lender if the borrower goes belly-up and defaults. Mortgage-backed bonds and equipment trust certificates would be examples of secured bonds. Unsecured bonds (called debentures) are those backed only by the full faith and credit of the borrower. T-bonds fall into this category, and are the safest of all bonds because the federal government has never defaulted on a loan and is unlikely to; it can, if necessary, print more money to continue payments.
Most corporate bonds are unsecured also, but when issued by reliable institutions such as the Dow 30 industrials, they are reasonably safe, too. Many corporate borrowers, however, to make their unsecured bonds more attractive to the lending public, often add some frosting, called a conversion privilege. They issue convertible bonds, which give investors the option of exchanging at some point their unsecured corporate bonds for a specific number of shares of common stock in the company, as a guarantee of repayment on the loan instead of receiving cash.
Bonds come either in bearer or registered form. Ownership of a bearer bond is simply ascribed to whoever bears the bond in his or her possession; thus it is highly negotiable, like cash. Bear bonds have coupons attached. Each coupon - another word for interest in bond jargon - represents a scheduled interest payment due from the borrower. On most bonds, payments are due twice a year. At the appropriate time, the bearer whips out the scissors, clips the coupon from the bond certificate, and sends it in to receive payment.
Most 30-year corporate and many municipal bonds include a call provision. This is a string attached that gives the borrower the option , within a certain number years, of paying off the bond before its scheduled maturity date. Should interest rates drop significantly, the issuer can then save money by floating new bonds at the lower market rates. It's basically the same strategy as refinancing your home mortgage if market rates fall in order to reduce the size of your monthly interest payments. If the bond is called, the investor is typically paid a premium (a figure slightly higher than the bond's face value) as compensation for the loss of long-term steady income, the result of the debt's being retired early. T-bonds tend not to have call provisions, another big advantage to them in terms of greater investor protection.
