Test your knowledge

Choose wisely. There is only one correct answer to each question.

Keep studying!

Review your answers below to learn more.

Securities without collateral have higher credit ratings than those with collateral.

True

False

False. Securities without collateral are given lower credit ratings than those with collateral.

Which investment pledges a portfolio of securities as collateral?

Equipment trust certificate

Repurchase agreement

Revenue municipal bond

Mortgage-backed bond

Repurchase agreement. Repurchase agreements use portfolios of securities as their collateral.

If the issuer of a collateralized debt security defaults, _______.

The investor loses all of his or her money

The investor gets his or her original investment back

The investor can seize or sell the collateral

The investor can seize or sell the collateral. The collateral must be forfeited to the investor in lieu of the normal bond payments.

Which of the following is not true?

Non-collateralized corporate bonds generally have higher coupon rates than those with collateral.

The higher a collateral's quality, the higher its coupon rate.

Government bonds backed by collateral have higher coupon rates than government bonds not backed by collateral.

Adding collateral to a security lowers its risk.

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.

A collateralized security has a lower default risk than one without collateral.

True

False

True. Collateral ensures that some kind of payment will be made to the bondholder.