Collateralization occurs when a borrower pledges an asset as being available to a lender if the borrower cannot repay a loan. A lender requires collateral when the borrower does not have a sufficient lending history or cash flows to give assurance that it can repay a loan. Collateralization may also reduce the default risk of the lender so much that it can offer a loan at a reduced interest rate.

For example, a public company pledges its assets as collateral on a bond offering, so that it can obtain a lower effective interest rate on the bonds from investors.

Related Courses

CFO Guidebook 
Corporate Finance 
Treasurer's Guidebook