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Collateral Trust Bonds

It is common for corporations to maintain large securities portfolios, and these financial assets are perfect for collateralizing a bond issue. Collateral trust bonds are secured by a portfolio of stocks and bonds, which is held by a trustee on behalf of bondholders.

Collateral trust bonds are usually backed by securities of other companies as investments. However the issuing corporation will also use stocks and bonds of partially or wholly owned subsidiaries as collateral, if such subsidiaries are owned. Another option is to pledge the company's prior lien long-term bonds that are held in trust to secure new, short-term collateral trust bonds. Or a corporation may use installment payments or other obligations of the corporation's clients to secure a collateral trust bond.

The risk associated with this kind of secured bond is as varied as can be, as the worth of the collateral depends not only on the issuing corporation's financial security, but also on that of the companies whose securities are backing the bonds. Because there are more variables involved, collateral trust bonds tend to have higher risk (and thus higher interest payments) than mortgage bonds.

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