When a company, or a bank, wants to borrow it can do so by offering investors a number of different types of tradeable debt, or bonds.
The least risky type of debt is often secured. This means the lender, or bondholder, has first claim over certain assets say, land in the event that interest or the original capital is not repaid or the issuer goes bust. Other lenders will accept less, or perhaps no security, but will expect a higher return, or yield.
Standard bonds usually rank below secured bonds and alongside other commercial creditors (such as trade suppliers) in the event of the bankruptcy of the issuer.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Below them come the holders of subordinated debt. These are lenders willing to accept a high yield in the good times knowing that if something goes wrong they will rank below most other bondholders when it comes to paying them back.
-
8 of the best lakeside properties for saleThe best lakeside properties – from a house on the southeastern shore of Loch Lomond, to a 15th-century hall overlooking a lake in King’s Lynn, Norfolk
-
Gold’s allure and why you should never 'pay a premium for graded coins'It is easy to become distracted by the beauty of gold, but remember why you buy it, says Dominic Frisby
