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Whether long-lived assets like property, plant, and equipment are pledged as security is an important consideration for bondholders because it helps to safeguard their investments. It is important to the corporation because the pledging of all these assets may restrict future borrowings. The total amount of authorized bonds is usually a fraction of the pledged assets, for example, 50%. The difference represents a margin of safety to bondholders. The value of these assets can shrink substantially but still permit reimbursement of bondholders should the company be unable to pay the bond interest or principal, and need to sell the pledged assets.
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