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Bonds 106: The Role of Collateral

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1.
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.
2.
The less risk an investment has, the more an investor expects to earn from it.
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False. The more risk an investment has, the more an investor expects to be able to earn from it.
3.
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.
4.
If a revenue municipal bond defaults, investors do not receive their principal back from the bond.
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True. That is because payment normally comes from various revenues, which may not be there in the event of default.
5.
Loan and debt issuers use collateral to attract investors.
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True. Collateral helps protect against losses from default.