A Secured Bond Vs. a Cash Bond

A Secured Bond Vs. a Cash Bond

A Secured Bond Vs. a Cash Bond

All bonds are not created equal, and this is certainly the case when it comes to secured bonds and cash bonds. A secured bond is a form of debt that is secured by collateral, such as property or another type of asset. A cash bond involves the payment of cash from one party to another to provide assurance that an obligation will be met. For couples seeking investment options, a secured bond gives you greater investment protection due to the attached collateral.

Features of a Secured Bond

A secured bond has collateral, such as cash or tangible assets, attached. The collateral provides greater assurance that a bond’s principal and interest payments will be met because the creditor can seize the attached assets to meet payment obligations. The collateral decreases the bond’s risk since there is less of a chance of default; the lower risk rating also reduces returns on the bond. The rate of return is also affected by the quality of the collateral; the higher the credit rating, the lower the return on the bond.

Examples of Secured Bonds

An example of a secured bond is a mortgage bond. This type of bond is backed by real estate and may include other corporate assets. This type of bond is considered a high-grade investment with very low risk of default. A trustee who represents the bondholders holds the title to the property and, if the bond defaults, he is able to foreclose on the property for the bondholders. Another type of secured bond is a revenue bond, which is issued by local governments to finance capital projects. The anticipated project revenue is used to secure the bonds.

Features of a Cash Bond

A cash bond can be used to provide assurance that another party will perform an obligation or meet an arrangement. The party that must fulfill the obligation pays a sum of money to the other party, and if she fails to meet the terms of the arrangement, she will lose her money. If she complies with the terms specified, the other party must return the original cash payment to her.

Example of a Cash Bond

Cash bonds are typically seen in the judicial system, where a defendant must pay a sum of money to the court to be temporarily released from jail. The release is given pending a future court date that requires the presence of the defendant. If the defendant fails to show up on his designated court date, he forfeits his cash bond payment. If the defendant meets his court date, the cash bond is returned to him.

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About the Author

Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. She has more than 10 years of combined experience in auditing, accounting, financial analysis and business writing.