You may want to invest in a bond rather than exposing yourself to the risks of the volatile nature of the stock market. Bonds, unlike stocks, offer protection and high ranking claim if the issuer defaults on payments.
The main difference between mortgage bonds and debenture bonds are their requirements. While one requires collateral to help back the investment, the other is offered on good faith and credit standing only.
There are two categories of bonds: secured and unsecured. Generally, these will be mortgage bonds (or secured bonds) or debenture bonds (unsecured bonds).
Understanding the Differences between a Mortgage Bond and Debenture Bond
What is a mortgage bond?
This kind of bond is always backed by collateral. That collateral will vary from situation to situation but is usually real estate or some other type of property that is subject to a mortgage. If the payer defaults on a bond, you can foreclose and sell the property tied to the bond to collect your investment. Because of this direct back-up with a piece of collateral, mortgage bonds are a safe, high-quality investment with a lower chance of default than other kinds of bonds.
Mortgage bond example
A commercial mortgage bond is one example of a mortgage bond. The types of collateral tied to these loans tend to be commercial property: anything from an office tower to a small shopping mall. $86.4 billion in U.S. commercial mortgage bonds were issued in the U.S. in 2017 alone.
What is a debenture bond?
A debenture bond is unsecured, which means it is not backed by collateral property. When a company does not have enough assets to serve as collateral, credit standing will be the main criteria. Good credit basically serves as a promise that the bond’s payment terms will be met. These are generally offered on good faith, with high risks for the investor.
Issuing debenture bonds is an easy way for a company with a well-established history and business and high credit-standing to raise funds. However, it’s worth reiterating that a debenture bond is typically more risk averse than mortgage bonds. Because there is no collateral to help secure this bond, they are characterized by higher interest rates to investors. If a company liquidates, mortgage bondholders are paid first and debenture bondholders are paid after.
Example of a debenture bond
The U.S. government Treasury bond is one example of a debenture bond. A Treasury bond is guaranteed by the good credit standing of the U.S. government. They are available in a variety of maturity periods, ranging from as little as one month to as long as 30 years. While most kinds of debenture bonds issued by private businesses are considered high risk, this kind of bond is a bit safer because the federal government can create money if it needs to in order to meet payment terms.
First Choice Mortgage Will Help You Make the Right Decision
No matter what step in the house-buying process you’re in, First Choice is here to help you make all the right decisions for your situation. We can explain the intricate details of the mortgage and loan process. Check out our loan program pages to see what will be the best option for you.