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Difficulty: MediumGovernment, Municipal, and Corporate Bonds

Match each type of corporate bond with the primary collateral or backing mechanism that secures the issue.

  • Equipment Trust CertificateSpecific physical transportation assets such as railroad rolling stock, airplanes, or cargo containers
  • Collateral Trust BondFinancial securities (such as stocks or bonds of other companies) deposited with a trustee
  • Mortgage BondReal estate properties, land, and physical buildings owned by the issuing corporation
  • DebentureNo physical collateral; backed solely by the general creditworthiness and full faith of the corporation

Answer

Equipment Trust Certificates match with transportation assets (rolling stock/aircraft). Collateral Trust Bonds match with portfolio securities held in trust. Mortgage Bonds match with real estate and physical property. Debentures match with full faith and general credit (no physical collateral).
Corporate bonds are classified as either secured or unsecured based on their underlying collateral. Equipment Trust Certificates are secured by movable equipment (rolling stock). Collateral Trust Bonds are secured by financial securities pledged to a trustee. Mortgage Bonds are secured by real property and real estate. Debentures carry no collateral pledges and rely solely on the full faith, credit, and general reputation of the issuing corporation.

Step-by-Step Solution

1
Identify the backing for Equipment Trust Certificates.
Equipment Trust Certificates use specific movable equipment (e.g., train cars, fleet trucks, aircraft) as direct collateral.
Transportation companies issue these debt instruments using the equipment title as security until the debt is retired.
2
Identify the backing for Collateral Trust Bonds.
Collateral Trust Bonds use financial assets owned by the corporation (stocks/bonds of subsidiaries or other firms) deposited with a trustee.
Holding companies often use securities of subsidiary companies as pledged collateral.
3
Identify the backing for Mortgage Bonds.
Mortgage Bonds are secured by real property such as factories, land, and corporate real estate buildings.
The bondholder holds a mortgage lien against fixed real estate assets.
4
Identify the backing for Debentures.
Debentures have no specific asset collateral attached and rely on the full faith and credit of the issuing corporation.
Debentures represent general unsecured debt obligations of the issuing firm.

Key Concept

Distinction between secured corporate bonds (backed by physical equipment, real estate, or securities) and unsecured corporate debt (debentures).
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Topics

Government, Municipal, and Corporate Bonds

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