What is Collateral?

The term collateral describes pledged assets that a borrower commits as security against a debt to secure the repayment of the loan.  The most common example can be seen through a home buyer who pledges their house as collateral in case they default on the loan.  In the event of default, the lender will assume the collateral as their own and sell it off to satisfy repayment of the loan that was originally issued.  Foreclosure is a very common example of this concept in action; the bank will seize the home of a delinquent borrower and sell the home through auction or through other channels in an attempt to repay the original loan that was given to the borrower.

The securities market contains many structured products which are backed by collateral.  Mortgage backed securities, Asset backed securities, corporate bonds, REITs, and leveraged loans are just a few examples.
Tim Ord
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