What is a "secured bond"?
A secured bond is backed by some form of collateral. If the bond issuer is in material default, secured bondholders are highest in priority to be paid, even though they may not receive all of their principal. So it
When paying off creditors during a liquidation process, money goes first to those investors who own a piece of the company's assets.
is very important to understand the potential risks of default even when buying corporate secured bonds.
What is an "unsecured bond"?
Unsecured bonds typically have no collateral to provide investors protection against default, and therefore offer a higher interest rate and return in exchange for this risk.
How do I know which bond investments are riskier than others?
The risk of bonds can be seen with U.S. Treasury Bonds as the least risky bond investments on one end, and perhaps bonds that are not of investment grade, such as small start-up companies or companies nearing a bankruptcy filing as perhaps the riskiest of bond investments.
If bonds can be so speculative, how can bond markets and bond buyers know the worthiness of their investment?
Since bonds are just another form of credit, financial information reporting gives potential bond buyers a glimpse into the bond issuer's overall financial health, and allows comparisons to be made, conclusions to be drawn, and prices to be offered for these bonds. A bond issuer must provide enough information regarding its financial health before going to the market to find credit. Much (but not all) of this financial information can be found by carefully reading the bond's prospectus, and consulting an adviser. The prospectus covers many aspects of the bond and corporate entity's financial picture, and may provide information to help an investor decide whether to purchase the bond.
What are some of the top bond ratings organizations?
To a large degree, the bond market relies on the analytical work of several important ratings organizations, including Moody's Investors Service, Standard & Poor's, and Fitch Ratings. Each ratings organization may report on such important details as the financial health of the bond issuer, the management team of the issuer, economic conditions that may affect the issuer, the various characteristics of the debt, and sources of revenue that may secure the bond over time. Typically the best bonds are given ratings of AAA (by Standard & Poor's and Fitch), or Aaa (by Moody's). Many consider bonds rated below BBB/Baa quite speculative and highly risky.