Course 106: The Role of Collateral
Collateral
In this course
1 Introduction
2 Collateral
3 Collateral Used to Secure Bonds
4 Collateral Reduces Default Risk
5 Collateralized Securities May Offer Lower Rates
6 Advantage of Collateral

To guarantee the repayment of a loan or debt security, a debt issuer can provide extra assurance for investors in the form of pledged assets called collateral. Collateral is any asset that secures a loan or debt. If the issuer fails to repay the loan on time, the investor can seize or sell the collateral to recover the balance of the loan.

Adding collateral minimizes the risk of an investment's default, since the issuer does not want to lose the pledged collateral due to nonpayment. This makes the investment more attractive to investors. While collateralizing a loan or debt security does not guarantee that the loan's principal and earned interest will be repaid on time, it is a strong indication that this will occur

Next: Collateral Used to Secure Bonds >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.