An Equipment Trust Bond is a type of secured bond issued primarily by transportation companies to finance the purchase of new equipment, with bondholders having a claim to the equipment in case of default.
An Equipment Trust Bond (ETB), also known as an Equipment Trust Certificate (ETC), is a type of secured bond typically issued by transportation companies, such as railroads, airlines, or shipping lines, to finance the acquisition of crucial equipment. What distinguishes ETBs is that the bondholder has the first right to claim the equipment pledged as collateral if the issuer defaults on interest or principal payments.
An Equipment Trust Bond is a debt security backed by specific, tangible equipment, such as locomotives, aircraft, or ships. The issuer pledges the equipment to the bondholders as collateral, ensuring a higher degree of security compared to unsecured bonds. Here is a typical structure:
The formula to determine the bond price \(P\) for an Equipment Trust Bond is given by the present value of its future cash flows:
Where:
Historically, railroads in the early 20th century heavily relied on ETBs to expand their operations and update their fleets with modern locomotives. For instance, the Union Pacific Railroad issued equipment trust certificates in the 1920s to finance its rolling stock acquisitions.
In contemporary financial markets, Equipment Trust Bonds are used extensively by airlines and shipping companies. Due to the significant cost of airplanes and ships, these industries frequently employ ETBs to spread out the acquisition cost over many years.