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Bonds 106: The Role of Collateral

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1.
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.
2.
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.
3.
Securities with collateral are more attractive in the secondary market than they would be without collateral.
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True. Collateralized securities are perceived by many investors as safer investments.
4.
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.
5.
Which of the following is not true?
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The higher the collateral's quality, the higher its coupon rate. Since collateral makes a bond "safer" in the eyes of investors, the issuer can lower the coupon rate.