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Fixed and Floating Charges
When a company is seeking to raise finance with a bond issue, it will have
to provide some kind of security to the lender in order in order to
guarantee repayment of the bond. In this context security usually means some
kind of charge of the borrowers assets such as the property or patents so
that if the borrower defaults the the bondholders have a claim over those
assets before other creditors. This often makes the bonds safer then other
securities where their is no charge such as non-recourse loans. In certain
cases the security takes the form of a third-party guarantee. In most cases
the security will affect the interest rate. In other words the greater the
security offered, the lower the cost of borrowing.
Domestic corporate bonds are usually secured on the company's assets by way
of a floating or fixed charge. A floating charge places a general charge on
those assets that continually flow through the business and the composition
may be constantly changing. A fixed charge is legal charge, or mortgage,
specifically placed upon one or a number of the companys fixed or permanent
assets.
An important consideration is that if a company has a floating charge the
company may not be inhibited from disposing of any specific assets and its
borrowing is only subject to a floating charge. The floating charge may
simply cover whatever the company has in its possession at any time and
unless itemized or incorporated into an addendum connected to the floating
charge, no sale or disposition is prevented.
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