A type of fixed-income security that is not backed by collateral. It is backed only by the creditworthiness of the issuer (issuing entity). Unlike covered debt instruments, which depend on the collateral posted, uncovered instruments lack an additional layer of protection. However, the higher risk involved entails a bigger risk premium, and consequently a higher potential return.
Examples of uncovered debt instruments include commercial paper, unsecured bonds, and debentures. These instruments are particularly attractive for investors seeking higher returns compared to those generated by available covered securities.
It is also called an unsecured debt instrument.
