What is a Collateral Trust Bond?

A collateral trust bond is a bond that is secured by the issuer's own security investments. These investments are deposited with a trustee, who holds them on behalf of the bond holders. If the issuing entity defaults on its bond obligation, the bond holders receive the securities held by the trustee. This arrangement is needed when investors suspect that a bond issuer’s financial situation is so weak that it will be unable to pay interest or redeem bonds at their maturity date. It can also be used by financially healthier issuers who want to convince investors to accept a lower interest rate.