Summary of The Role of Collateral

Adding collateral to a security can make it more desirable to own. By using a pledged asset to guarantee repayment of a security’s debt, the less an investor has to worry about the potential for his or her investment defaulting. However, there is a tradeoff in the yields of corporate securities backed by collateral. Ultimately, your decision will come down to how safe you want to play it.

As an educated investor, you should be able to explain the purpose of collateral, identify the different types of collateral used to secure investments, and understand the pros and cons of collateralized securities.