Bonds (also known as debentures) are financial instruments used by companies and governments to raise money from investors. When you buy a bond, you are lending money in exchange for regular interest + repayment at maturity.
Now, these bonds are mainly of two types: secured and unsecured. This variety presents different opportunities and challenges for investors. Before investing, read this article to understand what secured vs. unsecured bonds are, how they differ from each other, and the major risks every bond investor should be aware of.
What are Secured Bonds?
A secured bond is backed by specific assets of the issuer. These assets act as “collateral”. If the issuer fails to repay the bond, investors can claim these assets to recover their money. The assets can be both:
- Tangible (like property, equipment, or plants)
and
- Liquid (like stocks or receivables).
Secured Bonds May Be Considered Safer!
As an investor, you must understand that secured bonds may give you a level of protection that unsecured bonds do not. If the issuer defaults (they fail to pay interest or repay the principal), the secured bondholders have a legal right to take possession of the pledged assets and sell them to recover their investment.
This reduces the risk of losing the entire investment! That’s why secured bonds are
generally seen as lower-risk compared to unsecured bonds.
For more clarity, let’s check out two secured bond examples:
| Example 1: Revenue Bonds | Example 2: Mortgage Bonds |
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What are Unsecured Bonds?
An unsecured bond is not backed by any specific asset or collateral. If the issuer fails to make payments, investors cannot claim any assets to recover their money. Instead, repayment depends entirely on the issuer’s:
- Financial strength
- Creditworthiness
- Reputation
- Promise to pay
Furthermore, holders of unsecured bonds are repaid only after secured creditors are paid from the sale of pledged assets. In some cases, unsecured bondholders may lose part or all of their investment. Some common unsecured bond examples are:
- Corporate bonds that are issued by companies without collateral.
- Short- to medium-term debt instruments.
- Treasury bills or short-term government securities that are not backed by specific assets.
Note that all of these types of unsecured bonds rely on the issuer’s ability to generate cash flow + honor debt payments.
Unsecured Bonds May Offer Comparatively Higher Returns!
Since unsecured bonds are not backed by any collateral, investors face a higher chance of losing money if the issuer defaults. Now, to make up for this added risk, issuers generally offer higher interest rates on unsecured bonds.
This extra return acts as a “risk premium” and rewards investors for trusting the issuer’s financial strength and credibility.
Difference Between Secured and Unsecured Bonds
The primary difference between secured and unsecured bonds is “collateral”. Secured bonds give investors a “legal claim on specific assets” if the issuer fails to repay. In contrast, unsecured bonds are supported only by the issuer’s creditworthiness (there is no collateral).
To further your understanding, check out the secured vs unsecured bonds comparison table below:
| Feature | Secured Bonds | Unsecured Bonds |
| Backed by Assets | Supported by specific assets such as property, equipment, or project revenues | No assets pledged as collateral |
| Risk of Repayment | Lower, because investors can recover money by selling pledged assets if the issuer defaults | Higher, because repayment depends only on the issuer’s financial strength |
| Recovery in Case of Default | Investors can claim or sell the pledged assets to recover dues | No guaranteed recovery; investors are repaid only after secured creditors |
| Interest Rates | Usually lower, since risk is reduced | Usually higher, to compensate for added risk |
Safety and Risk Factors Every Bond Investor Should Know Before Investing!
Be it secured or unsecured, each bond carries unique:
- Repayment terms
- Credit exposure
- Market sensitivity
To pick a better financial product as per your risk appetite, check out these five main risks before investing:
1) Credit (Default) Risk — “Will I Get Paid Back?”
It is a chance that the issuer cannot pay interest or return principal. If an issuer defaults, secured creditors get paid first; unsecured bondholders may recover little or nothing. You may assess this risk as follows:
- Check the issuer’s credit rating from rating agencies
- Read the rating rationale
- Review recent financials, particularly the interest coverage ratio and cash flow stability
To mitigate this risk, you may prefer higher-rated issuers (say, AAA-rated secured bonds) for capital preservation. Also, try to diversify across issuers and sectors.
2) Interest-Rate Risk — “What Happens if Market Rates Rise?”
Usually, bond prices fall when market interest rates rise. Now, if you sell before maturity, there is a chance you can incur a “capital loss”. On the other hand, even if you hold to maturity, rising rates reduce the market value of your holdings and the opportunity to reinvest at higher rates.
To mitigate this risk, you may invest in:
- Shorter-duration bonds
- Floating-rate debt instruments
- Inflation-linked debentures
Additionally, you may try to build a laddered portfolio, where your bonds mature at regular intervals.
3) Inflation (Purchasing-Power) Risk — “Will My Returns Buy Less Later?”
As time progresses, inflation erodes the real value of interest + principal. Fixed coupons lose purchasing power when inflation is higher than expected.
To mitigate this risk, you may compare bond yield to expected inflation. If yield < expected inflation, your real return can be negative! In such cases, you can consider inflation-linked bonds or shorter maturities.
4) Liquidity Risk — “Can I Sell When I Want?”
It is the risk that you cannot sell the bond at a fair price in the secondary market. This usually happens when the bond is not frequently traded and has less liquidity. Always remember that forced selling may lead to large price concessions.
Thus, as an investor, you may prefer buying liquid government bonds or widely issued corporate bonds (with high liquidity).
5) Legal and Documentation Risk — “What are the Bond’s Fine Print Terms?”
Your interest payments and recovery in the case of default are influenced by:
- Contract terms
- Covenants
- Priority of claims
- Cross-default clauses
So, before investing, always read the bond’s offer document. Look for details like:
- What backs the bond (security)?
- How does your “repayment rank” compare to others?
- What situations count as default?
- Who is responsible for protecting investors’ interests (the trustee)?
To Conclude, Secured vs Unsecured Bonds Differ in Terms of Asset-Backing!
So till now you must have understood that secured bonds are backed by collateral, which can be sold in case of default to repay bondholders. In contrast, unsecured bondholders have no such asset backing. They are paid only from the residual assets left after settling secured creditors, taxes, employee dues, and other obligations.
Because of this, unsecured bonds carry higher repayment risk, which makes them comparatively riskier than secured bonds. Thus, to attract investors, they usually offer higher returns as compensation for this added risk.
If you want to access the latest list of secured or unsecured corporate bonds, you can visit the GoldenPi platform. Here, you can browse various bond options, compare yields, and even invest online in your preferred scheme.
Secured vs Unsecured Bonds FAQs
What is the latest unsecured bond interest rate for 2025?
As of October 26, 2025, you may earn a coupon rate of up to 21% p.a. by investing in select unsecured bonds.
Can I buy unsecured bonds at par?
Yes, you can buy unsecured bonds at par value from the secondary market. This usually happens when the current market price (CMP) of the bond is equal to its face value (FV).
Are secured bonds safer for investors?
Yes! Secured bonds are backed by specific assets. This gives investors a safety net if the issuer defaults. However, this added safety usually means slightly lower returns compared to unsecured bonds.
Can I lose 100% of my capital invested in unsecured bonds?
Unsecured bondholders depend entirely on the issuer’s financial health, credit rating, and repayment capacity. Since no collateral is pledged against their investment, there is a possibility that investors may lose all or part of their capital.
Why do unsecured corporate bonds offer higher returns?
Unsecured bonds carry higher repayment risk since they lack asset backing. To compensate investors for this added risk, issuers often offer higher interest rates or yields.
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
