Collateral trust certificate
Also known as: collateral trust bond
A collateral trust certificate is a secured corporate bond backed by securities — typically stocks or bonds of another company — that the issuer deposits with a trustee as collateral for the bondholders.
A collateral trust certificate is a form of secured corporate debt. Instead of pledging physical assets like real estate or equipment, the issuing corporation pledges financial assets — most often the stocks or bonds of another company it owns, such as a subsidiary. Those securities are deposited with an independent trustee, who holds them for the benefit of the bondholders.
The mechanics are straightforward: a parent company that owns valuable shares of a subsidiary can borrow against them. If the issuer defaults on the certificates, the trustee can liquidate the pledged securities to repay investors. The quality of a collateral trust certificate therefore depends on two things — the issuer's ability to pay and the market value of the securities held in trust.
Collateral trust certificates sit within the family of secured bonds, alongside mortgage bonds (backed by real property) and equipment trust certificates (backed by rolling stock like airplanes or railcars). Secured bonds rank above debentures and subordinated debentures in a liquidation, which generally lets them carry lower yields than the same issuer's unsecured debt.
The Series 7 exam covers collateral trust certificates in its corporate debt products chapter. The tested distinction is what backs each secured bond type: securities of another company for collateral trust certificates, real property for mortgage bonds, and transportation equipment for equipment trust certificates.
Key takeaways
- A collateral trust certificate is a corporate bond secured by securities — often subsidiary stock — held by a trustee.
- If the issuer defaults, the trustee can sell the pledged securities to repay bondholders.
- It is one of the secured bond types, along with mortgage bonds and equipment trust certificates.
- Secured bonds rank ahead of debentures in liquidation and typically offer lower yields than unsecured debt of the same issuer.