Pledged Asset
A pledged asset is an asset that is used by a lender to secure a debt or loan and can include cash, stocks, bonds, and other equity or securities. A pledged asset is collateral held by a lender in return for lending funds. Pledged assets can reduce the down payment that is typically required for a loan as well as reduces the interest rate charged.
Pledged Assets
Definition
Pledged assets refer to the assets that a borrower uses to secure a debt or loan, including cash, stocks, bonds, and other equities or securities. These assets are provided to the lender as collateral to obtain the loan. Pledged assets can reduce the down payment required for the loan and lower the interest rate.
Origin
The concept of pledged assets dates back to ancient times when people used to mortgage land or other valuable items to obtain loans. With the development of financial markets, the forms and types of pledged assets have diversified, covering various securities and assets in modern financial markets.
Categories and Characteristics
Pledged assets can be categorized into several types, mainly including:
- Cash Pledge: The borrower deposits cash into a designated account as collateral, usually for short-term loans.
- Stock Pledge: The borrower uses their held stocks as collateral, suitable for individuals or companies needing large amounts of funds.
- Bond Pledge: The borrower uses their held bonds as collateral, typically for medium to long-term loans.
- Other Securities Pledge: Includes other financial instruments such as fund shares and options.
The main characteristics of pledged assets include:
- Risk Reduction: Pledged assets provide security for the loan, reducing the lender's risk.
- Increased Loan Amount: Pledged assets can increase the borrower's credit limit, allowing for a higher loan amount.
- Lower Interest Rate: Since pledged assets provide additional security, borrowers can usually enjoy lower loan interest rates.
Specific Cases
Case 1: Xiao Wang needs funds to start his entrepreneurial project but does not have enough cash. He decides to pledge some of his held stocks to apply for a loan from the bank. With the stocks as collateral, the bank agrees to provide the loan at a lower interest rate.
Case 2: A company needs funds for expansion but does not want to dilute shareholder equity. The company decides to pledge some of its held bonds to apply for a loan from a financial institution. After evaluating the value of the bonds, the financial institution agrees to provide the loan at a lower interest rate.
Common Questions
How is the value of pledged assets determined? The value of pledged assets is usually assessed by an independent appraisal agency or determined based on market prices.
Does pledging assets affect the borrower's ownership? The ownership of pledged assets typically remains with the borrower, but if the borrower fails to repay the loan, the lender has the right to dispose of the pledged assets.
