2.8.3. Collateral Trust Bonds

Question 1

What are collateral trusts?

Answer 1

They are bonds that are secured by financial assets such as stocks and bonds.

Question 2

What is another name for collateral trusts?

Answer 2

Collateral Trust Certificates (CTC)

Question 3

They are issued by companies ___________

Answer 3

that have few hard assets but significant amount of securities.
For example, holding companies often issue CTCs by pledging stock of a subsidiary.

Question 4

What does bond indenture require for CTCs?

Answer 4

The bond indenture requires that the market value of the collateral securities be greater than the face value of the bonds by a specified margin.

Question 5

What happens if the specfied margin narrows?

Answer 5

The issuer must provide more collateral to the trust

Question 6

Provide an example for narrowing of the margin

Answer 6

If the required collateral is 120% of the face value of the bond and the value drops to 115% then the company must provide additional collateral to raise the value back to 120% of the face value of the bond.