A loan stock is a form of fixed income security, a loan given to a business. Although the term loan stock might indicate otherwise, the holder of a fixed income security is merely the corporate creditor and has no influence on their business. There are two types of fixed-rate security: lending shares and bonds.
Not surprisingly the loan stock is the stock given in exchange for a loan. There are two basic types of loans available. The first kind, unsecured loan stock, basically means that the company receives the loan, gives no assurance to guarantee that the loan will be paid. In other words, if a company breaches the loan the creditor has no right to the company’s property as a repayment. Unsecured loans are therefore much like the unsecured loans individuals can get.
The second type of loan is called convertible loan stock. Convertible loan stock offers the company a low, fixed rate. The creditor benefits from having the ability to convert the loan stock into actual shares of the company. The loan contract contains special terms and a time frame for converting the loan stock.
Bond loans, the second type of fixed-rate collateral, differ from loan stock in that it is a secured loan. But the way a bond loan is secured is not exactly the same as when a person or entity offers a certain piece of property as collateral. In the case of collateral, the specific property is surrendered to the creditor to sell for payment if the person or entity defaults on the loan. In the case of a bond loan, the loan is secured only then, as there is no specific property assigned as collateral: if a company defaults on the loan, the creditor may sell any part of the company’s property that has not already been promised to others accounts as collateral, and can claim the proceeds as payment. Prescriptions benefit the company receiving the loan by allowing their property to be used as collateral for the other Sam Spade.