What is a corporate bond lacking specific collateral backing known as?

What is a corporate bond lacking specific collateral backing known as?

• A. Debenture
• B. Guaranteed bond
• C. Income bond
• D. Equipment trust certificate

Answer: (A)

A corporate bond that lacks specific collateral backing is known as a debenture. This type of bond relies on the creditworthiness and reputation of the issuer rather than any specific asset or collateral. The higher the issuer's credit rating, the more confidently investors may assess the likelihood of receiving their interest payments and the return of principal at maturity. Debentures are typically unsecured, meaning they do not have specific assets pledged as security, which makes them riskier than secured bonds. Hence, they tend to offer higher interest rates to compensate investors for this added risk. Investors primarily judge their risk based on the issuer's overall financial strength. The other options include specialized types of bonds that do not fit this definition. Guaranteed bonds are backed by a third party, income bonds rely on the issuer's ability to pay based on income levels, and equipment trust certificates are secured by specific equipment assets. Therefore, these alternatives do not describe a bond that is not secured by specific collateral.

A corporate bond that lacks specific collateral backing is known as a debenture. This type of bond relies on the creditworthiness and reputation of the issuer rather than any specific asset or collateral. The higher the issuer's credit rating, the more confidently investors may assess the likelihood of receiving their interest payments and the return of principal at maturity.

Debentures are typically unsecured, meaning they do not have specific assets pledged as security, which makes them riskier than secured bonds. Hence, they tend to offer higher interest rates to compensate investors for this added risk. Investors primarily judge their risk based on the issuer's overall financial strength.

The other options include specialized types of bonds that do not fit this definition. Guaranteed bonds are backed by a third party, income bonds rely on the issuer's ability to pay based on income levels, and equipment trust certificates are secured by specific equipment assets. Therefore, these alternatives do not describe a bond that is not secured by specific collateral.