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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.