A type of fixed-income security that provides investors with a higher level of protection compared to unsecured debt securities. Such a security is backed by certain assets or collateral that serve as a guarantee for the investors (holders). By having collateral tied to the instrument, the issuer limits the potential losses that investors may face in case of default. Specifically, in the event of default, the collateral (collateralized assets) can be seized and liquidated to repay the investors.
Unlike unsecured debt securities, which depend entirely on the issuer’s creditworthiness, secured securities provide an additional layer of protection. However, the lower risk involved entails a lower risk premium, and consequently a lower return.
Secured debt instruments are particularly attractive for risk-averse investors in the lookout for stable income flows.
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