Bond

A. Unsecured Long-term debt have a lower priority in repayment compared to other debts of
which relies only XYZ Corporation. In case of financial distress or bankruptcy,
Debentures are a type of long-term debt issued by a holders of subordinated debentures will be paid only after
corporation. They are not backed by any specific assets
secured creditors and holders of regular (unsubordinated)
(unsecured), relying only on the reputation and financial
debentures are satisfied. The higher risk associated with
stability of the company. Because they are unsecured,
subordinated debentures is compensated by potentially
bondholders are concerned about the company's ability to
higher interest rates.
generate enough earnings to repay the debt.

To protect bondholders, the company may agree not to issue

which
more secured long-term debt in the future, which would use Income bonds are a type of bond that pays interest only if the
specific assets as collateral. This restriction helps prevent the issuing company earns enough profit. If the company doesn't
company from over-encumbering or labis na pagsasanla ng earn sufficient profit to cover the interest payment, it doesn't
ari-arian. lead to bankruptcy or default.

For the company issuing debentures, they benefit by being If the company cannot pay the interest on these bonds when
able to borrow money without immediately tying up specific due, the unpaid interest usually accumulates and must be
assets as collateral. This preserves their ability to borrow paid later, before any dividends are paid to the company's
more in the future if needed. stockholders.

In summary, debentures are a way for companies to borrow These bonds are typically issued when a company is
money based on their reputation and financial health, reorganizing and facing financial challenges. Income bonds
providing flexibility in borrowing while requiring careful often have longer maturity periods compared to regular
consideration of the company's ability to repay. bonds.

Debentures (Unsecured Long-Term Debt):Example: ABC In summary, income bonds pay interest based on the
Corporation issues debentures to raise funds for expanding company's earnings, and unpaid interest may accumulate
its operations. The debentures are not backed by any specific and must be paid before dividends are distributed to
assets but rely on ABC Corporation's creditworthiness. shareholders. They are used during financial reorganizations
Bondholders invest based on the company's reputation and and offer flexibility in interest payments based on company
financial health. If ABC Corporation performs well, performance.
bondholders receive interest payments and eventual
Income Bonds (Unsecured Long-Term Debt):Example: LMN
repayment of principal. However, if the company faces
Inc., a struggling tech startup, issues income bonds to raise
financial difficulties, bondholders may face higher risk of non-
capital during a financial restructuring. These bonds pay
repayment compared to holders of secured debt.
interest only if LMN Inc. generates sufficient profits. If the
company's earnings fall short, bondholders may not receive
wherein interest payments immediately. However, unpaid interest
Subordinated debentures are a type of bond where the typically accumulates and must be paid before dividends to
bondholders' claims are considered less important
shareholders. This structure provides flexibility to LMN Inc.
compared to other types of debt. This means that if the
during financial challenges but adds risk for bondholders
issuing company faces financial trouble and needs to repay
reliant on company performance.
debts, the holders of secured debt (backed by specific
assets) and unsubordinated debentures (regular debentures)
will be paid first before the holders of subordinated Bond
B. Secured Long-Term Debt
debentures.
legal claim
A mortgage bond is a type of bond that is backed by a lien
In simple terms, if there's not enough money to repay all
on real property, like a house or building. This means that
debts, those with subordinated debentures might receive
if the issuer (the entity borrowing the money by issuing
payment later or receive less compared to other creditors like
the bond) fails to repay the bond, the bondholders have a
secured debt holders or regular debenture holders.
claim on the property. na ginamit to secure the bond.
This arrangement makes subordinated debentures riskier for so, how does it work?
Here's how it works:
investors but can provide benefits such as higher interest
rates to compensate for the higher risk. Security: The value of the real property securing the bond
(like a house) is typically higher than the value of the
Subordinated Debentures (Unsecured Long-Term
bonds issued. This is done to give bondholders a safety
Debt):Example: XYZ Corporation issues subordinated
net—if the property's value decreases, there's still
debentures to finance a major project. These debentures
enough value to cover the bonds.
Foreclosure: If the issuer can't pay back the bonds when compared to first mortgage bonds. This means that if the
they mature (come due), the bond trustee (a designated same property is pledged as collateral for both first
entity) can take ownership of the property through mortgage bonds and second mortgage bonds, the
foreclosure. The trustee can then sell the property and holders of the second mortgage bonds will be paid only
use the money from the sale to repay the bondholders. after the holders of the first mortgage bonds have been
Dito sa mortgaged bond, fully satisfied.
Protection for Bondholders: Bondholders are protected
because they have a claim on the property. Even if the This subordinate position increases the risk for holders of
issuer defaults, bondholders can recover their second mortgage bonds compared to holders of first
investment by taking ownership of or selling the mortgage bonds.
mortgaged property.
Example: Company XYZ issues second mortgage bonds
In summary, mortgage bonds are safer for investors to raise funds for a new project. These bonds are secured
because they are backed by real property. This gives by a property that is already pledged as collateral for
bondholders assurance that they can recover their existing first mortgage bonds. If Company XYZ defaults,
investment through the property if the issuer fails to repay the holders of the first mortgage bonds will be paid off
the bonds. before the holders of the second mortgage bonds receive
any payments.
Mortgage Bonds can further be subclassified as
follows: Blanket or general mortgage bonds are a type of bond
where all of the assets of the issuing firm are pledged as
First mortgage bonds are a type of mortgage bond that
security. This means that if the firm defaults on the bond,
has the highest priority claim on the secured assets. This
all of its assets can be used to satisfy the bondholders'
means that if the same property is pledged as collateral
claims.
for multiple mortgage bonds (such as first mortgage
bonds and junior mortgage bonds), the holders of the first The bondholders of blanket or general mortgage bonds
mortgage bonds have the first right to the property's value have a lien (legal claim) on all of the firm's assets. This
ang may unang karapatan sa value ng property
in case of default.in case of default. ensures that if the firm is unable to meet its obligations
and defaults on the bonds, the bondholders can access
This seniority gives first mortgage bondholders priority in and sell any of the firm's assets to recover their
receiving payments from the sale of the property if the
investment.
issuer defaults.
Example: Company ABC issues blanket mortgage bonds
If the property is foreclosed upon due to default, the
where all its assets, including real estate, equipment,
proceeds from the sale of the property will first go
and inventory, are pledged as security. If Company ABC
towards repaying the holders of the first mortgage bonds.
defaults on its bonds, bondholders have a claim on all of
Only after the first mortgage bondholders are fully paid
its assets to recover their investment.
will the remaining proceeds, if any, go towards repaying
holders of other mortgage bonds on the same property. Closed-end mortgage bonds are a type of bond where
the assets pledged as security cannot be used to secure
In summary, first mortgage bonds provide a higher level
any additional bonds in the future. This means that once
of security and priority to bondholders compared to other
specific assets are assigned as security for closed-end
mortgage bonds on the same property. This senior claim
mortgage bonds, they cannot be used to secure other
ensures that first mortgage bondholders are more likely
bonds issued later.
to recover their investment in case of default by the
issuer. The restriction on using pledged assets for other bonds
limits the borrowing capacity of the issuing entity. This
First Mortgage Bonds (Secured Long-Term Debt - constraint is designed to provide a higher level of security
Mortgage Bonds):Example: Real Estate Development
and assurance to the bondholders of closed-end
Company issues first mortgage bonds to finance a new
mortgage bonds.
commercial property development. These bonds are Company XYZ
secured by a first lien on the property. In case of default, Example: Municipality MNO issues closed-end
bondholders have the first claim on the property's value mortgage bonds to finance the construction of a new
through foreclosure. This security attracts investors school. The bonds are secured by the new school
seeking lower risk compared to unsecured debt, as the building and grounds. These assets cannot be used to
value of the property backs the bond. secure any future bond issuances, ensuring that
bondholders have specific collateral for their investment.
Second mortgage bonds are a type of mortgage bond
This is done para ma-ensure na yung mga bondholders ay may
that has a lower priority claim on the secured assets specific collateral for their investment.
meron silang permit to issue addtl mortage bonds using the same secured assets as collateral.

Open-end mortgage bonds are a type of bond that

permits the issuance of additional mortgage bonds using Meaning, pwede pang gamitin nung issuer yung same asset para magsecure
the same secured assets as collateral. This means that pa ng maraming bonds kung kinakailangan.
the issuer can use the same assets to secure more bonds
in the future if needed.

In some cases, there may be restrictions or requirements

placed on the issuer when issuing additional bonds. For
example, the issuer may need to add more assets to the
secured property if new debt is issued, ensuring that the
value of the collateral supports the increased debt.

While open-end mortgage bonds provide flexibility, they

also carry risks for bondholders. Issuing more bonds
secured by the same assets can increase the overall debt
burden and potential risk of default if the value of the
collateral decreases.
XYZ
Example: Utility Company UVW issues open-end
mortgage bonds to fund infrastructure upgrades. The
bonds are secured by the company's transmission lines
and substations. In the future, if Utility Company UVW
needs additional funds, it can issue more bonds using
the same secured assets as collateral.

Limited open-end mortgage bonds are a type of bond

that permits the issuance of additional bonds, up to a
specified limit, using the same mortgaged assets as
collateral. However, these additional bonds are issued at
the same priority level as the existing bonds, meaning
they share the same claim on the secured assets.

The additional bonds issued under limited open-end Yung addtl bonds na inissue dito ay may same priority
provisions have the same priority level as the original level as the original bonds. Ibig sabihin lang nito na yung both
existing and new bondholders, ay may equal right sa
bonds. This means that all bondholders, both existing secured assets in case of default.
and new, have equal rights to the secured assets in case
of default.

Example: Real Estate Developer PQR issues limited

open-end mortgage bonds to finance a housing project.
The bonds are secured by the land and completed
houses in the project. PQR can issue additional bonds up
to a specified limit using the same assets as collateral,
but these new bonds will have equal priority to the
existing bonds on the secured assets in case of default.