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What is a Trust Certificate?

By Lindsey Rivas
Updated May 16, 2024
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A trust certificate is a secured bond, usually in a public corporation, that is backed by other assets that are held as collateral. A corporation will issue trust certificates to raise capital for various expenditures. If the company that has the debt does not pay the loan in full, then the collateral assets can be sold or seized so that the trust certificate holders can recover part of their investment. Company assets that are used to back trust certificates include company stock shares or physical equipment.

Although trust certificates are considered safer than unsecured debt, they typically earn lower interest than riskier, more aggressive investments. Investors who hold trust certificates for a company need to be aware of the overall financial state of that company as well as what underlying assets are held as collateral to back the certificates. Investors should also be wary of investing in trust certificates that have the same company's stock as the certificate collateral, because if the company experiences financial trouble, then the trust certificates can become as worthless as the company stock that backs them.

A bond is a debt investment in which a company or government will borrow funds to raise capital for expenditures such as the purchasing of equipment. The issuer has a legal obligation to repay the borrowed amount to the investors by a specified date. The percent of interest that the issuer promises to pay on the loan is stated on the bond at the time of issue.

In general, there are two types of bonds: secured and unsecured. A secured bond, such as a trust certificate, is one for which the issuer has specified certain assets as collateral for the principal and interest payments of the loan. A trustee holds the title to those assets so that in the event of a default, the bondholder can claim the collateral assets. By contrast, an unsecured bond has no collateral to back it and is considered a higher risk than a secured bond, which also means that it offers higher income. An example of an unsecured bond is a high-yield bond or junk bond.

A collateral trust bond is one type of a trust certificate that is issued by corporations. It is backed by securities of other companies that the corporation holds as investments. The bond can be backed by assets such as stocks and bonds of partially or wholly owned subsidiaries, the stocks and bonds of a completely different company, or government treasury securities.

Another type of a trust certificate is called an equipment trust certificate, which is usually issued by airlines, trucking companies, railroads, and oil companies. With this type of certificate, the borrowed funds are used to purchase physical equipment. The title for the equipment is held by a trustee, generally a bank, until all certificates are fully paid. The certificate typically matures before the equipment wears out, so the amount borrowed is usually less than the full value of the assets that secure the trust certificate.

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