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Bonds 106: The Role of Collateral

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1.
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.
2.
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.
3.
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.
4.
Which investment pledges a portfolio of securities as collateral?
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Repurchase agreement. Repurchase agreements use portfolios of securities as their collateral.
5.
Adding collateral to a security makes it more marketable.
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True. Many investors are attracted to the safety feature provided by collateral.