Secured note investments refer to debt instruments that are backed by collateral pledged by the borrower. They occupy an interesting middle ground between stocks and bonds – providing higher yields than bonds while taking on less risk than stocks. As the name suggests, the key advantage of secured notes is the senior collateral backing, which can cushion against potential losses. Investors favor them for diversification and their stable cash flows.
Senior status ensures first claim on assets
Secured notes derive their relative safety from senior status and collateral backing. As senior debt, they have first claim on the borrower’s assets if there is a default. The pledged collateral – which can include equipment, real estate, accounts receivable etc. – provides an extra layer of protection. So while they carry more risk than investment grade bonds, the senior collateral makes secured notes more stable than high yield bonds or stocks.
Higher yields than bonds with reasonable risks
By sitting between bonds and stocks in the risk-return spectrum, secured notes offer higher yields than investment grade corporate, municipal or government bonds. The extra yield compensates for the higher default risk relative to bonds while the senior status and collateral minimize downside risk compared to stocks or unsecured high yield debt.
Portfolio diversification with steady cash flows
The distinct risk-return attributes of secured notes make them useful for diversification in an investment portfolio. The collateral backing leads to a more predictable default and loss profile. And the fixed quarterly or monthly interest payments provide steady cash flow comparable to bonds. Thus secured notes can enhance overall portfolio stability.
In sum, secured note investments provide healthy yields backed by senior claims on pledged collateral. For investors seeking above-bond returns with less risk than stocks, they offer an appealing middle ground.