What is an unsecured bond?

An unsecured bond, also known as a debenture bond, is a type of bond that is not backed by any collateral. This means that the bondholder does not have a claim to any specific assets of the issuer in the event of default. Instead, the bond is backed only by the issuer's creditworthiness and ability to repay the debt.

Unsecured bonds typically have higher interest rates compared to secured bonds because they carry a higher risk for investors. This is because in the event of default, bondholders of unsecured bonds are considered lower in priority than secured bondholders, who have a claim to specific assets of the issuer.

Despite the higher risk associated with unsecured bonds, they are still considered a relatively safe investment compared to other types of financial instruments. Issuers of unsecured bonds are typically large, established companies with solid credit ratings. Investors can also diversify their investment portfolios by including a mix of secured and unsecured bonds to mitigate risk.