What best describes a collateral trust bond?

What best describes a collateral trust bond?

• A. A bond secured directly by the company's assets
• B. A bond secured by stocks and bonds from other companies
• C. A bond secured by customers' future payments
• D. A bond backed by government only

Answer: (B)

A collateral trust bond is indeed best described as a bond secured by stocks and bonds from other companies. This type of bond provides security to bondholders through a trust that holds collateral, typically consisting of financial securities rather than physical assets. This arrangement allows the issuer to provide additional confidence to investors by pledging securities that have a liquid market value, making the investment less risky. In the event of default, bondholders have the right to take possession of the pledged securities, which can help in recovering their investment. Understanding this security mechanism is essential for recognizing why collateral trust bonds appeal to investors, especially in terms of risk management and the assurance of financial backing through other, potentially stable, investments.

A collateral trust bond is indeed best described as a bond secured by stocks and bonds from other companies. This type of bond provides security to bondholders through a trust that holds collateral, typically consisting of financial securities rather than physical assets.

This arrangement allows the issuer to provide additional confidence to investors by pledging securities that have a liquid market value, making the investment less risky. In the event of default, bondholders have the right to take possession of the pledged securities, which can help in recovering their investment.

Understanding this security mechanism is essential for recognizing why collateral trust bonds appeal to investors, especially in terms of risk management and the assurance of financial backing through other, potentially stable, investments.