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How Bonds Are Backed Up |
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This article is from the Investing Articles: Bonds series.
Asset-backed bonds, are secured, or backed up, by accounts receivable, or money owed to the issuers. An asset-backed bond can be created when a securities firm bundles some type of debt, like mortgages or credit card debt, and sells investors the right to receive the payments that consumers are making on those loans.
Debentures are the most common corporate bonds. They're backed by the credit of the issuer, rather than by any specific assets. Though they sound riskier, they're generally not. The debentures of reliable institutions are typically more highly rated than asset-backed bonds.
Pre-refunded bonds are corporate or municipal bonds, usually AAA rated, whose repayment is guaranteed by the funds from a second bond issue. Proceeds from the secondary issue are usually invested in safe U.S. Treasury issues.
Mortgage-backed bonds are backed by a pool of mortgage loans. They're sold to brokers by government agencies and private corporations, and the brokers resell them to investors. Mortgage-backed bonds are self-amortizing. That means each payment you get includes both principal and interest, so that there is no lump-sum repayment at maturity.
Collateralized mortgage obligations (CMOs) are more complex versions of mortgage-backed bonds. Although they are sold as a reasonable alternative to more conventional bonds, evaluating their risks and rewards requires more specialized skills.
Continue to:
bonds, convertible bonds, federal funds, glossary, foreign currency, municipal, government, savings, tax exempt, yeilds, US Treasure bonds, financial information, investing, investment tools, reference
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