Depending on the type of fixed income investments you hold, using them as collateral can be easy. If you hold U.S. Treasury securities or high-quality corporate or municipal bonds, any bank or broker will lend against them. The loan will operate like any other loan in that you will have to make monthly loan payments. The only difference is that your bond collateral will be marked to market --- valued daily to determine if it can still be sold for at least as much money as when the loan was written. If the bond falls in value, you will be asked to pay additional money to make up the difference between the present value and the original collateral value.
Get full descriptions of your bonds. Include the name of the issuing entity, the coupon or interest rate percentage listed in the name of the bond and the maturity date. The name of the issuer is likely to be one of three types: U.S. Treasury, a corporation or a municipality.
Ask whether your bank accepts bonds as collateral for your loan. Some banks have associations with brokerage firms so you may be directed to deal with the bank's brokerage division for a margin loan rather than a consumer loan.
Open a brokerage account if you do not already have one. You will be able to borrow against the bond but will have to open a margin account. The broker will tell you if your bond qualifies as margin collateral.
Inform the lender that you want your bonds put in certificate form or deposited into your brokerage firm account. If you already hold the certificates, take them to your bank or broker for deposit against the loan or in your margin account.
Fill out the paperwork for the bank loan, including a stock power, which gives them the right to sell your bond if you default on payments. If you are borrowing on margin from your broker, the margin agreement covers the right of the broker to sell your securities if you default on payment or their value falls and you do not pay in the extra money to cover your margin call.
Tips & Warnings
- A margin on bonds is generally 20 percent, meaning that you can borrow up to 80 percent of the value of the bond. The cash will be deposited to your brokerage cash account and you can either use a debit card, write checks or order it sent to your bank account, depending on the services your broker provides for cash accounts.
- Stock holdings are also marginable and may be used to secure a bank loan if they meet certain requirements. Generally, the amount of money available as a loan is a smaller percentage of the value of the stock than would be available if using a bond as collateral.
- Check the value of your bond at least once a week. If its value drops, and you cannot pay the extra money to bring the collateral value up to the required level, your bond will be sold. When borrowing against securities, it is wise to leave some money in the account to handle market price fluctuations.