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Bonds 106: The Role of Collateral

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1.
In an equipment trust certificate, a trustee holds the title to the collateral.
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True. A third-party trustee holds the title.
2.
Government collateralized securities are secured by the taxing power of the government.
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False. Government collateralized securities are not secured by the taxing power of the government, but by the collateral itself.
3.
A collateralized security has a lower default risk than one without collateral.
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True. Collateral ensures that some kind of payment will be made to the bondholder.
4.
Securities without collateral have higher credit ratings than those with collateral.
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False. Securities without collateral are given lower credit ratings than those with collateral.
5.
If the issuer of a collateralized debt security defaults, _______.
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The investor can seize or sell the collateral. The collateral must be forfeited to the investor in lieu of the normal bond payments.