106 Collateral Reduces Default Risk
Collateral Reduces Default Risk
Securities that are collateralized have higher credit ratings than those without collateral. A credit rating is a measure of a security’s likelihood of default. The higher the credit rating, the less likely the issuer of the security is to default.
Things To Know
- A collateralized security offers investors a secure investment.
Benefits of collateral
A collateralized security offers investors a secure investment. In the event of a default, the investor has a better chance of receiving all or part of the investment that he or she otherwise would be left without.
Adding collateral to a security also makes it more marketable. This is especially true for issues from small governments or companies that do not have name recognition among investors. Without collateral, many of these securities would not be attractive in the secondary market.
