California Real Estate Practice Exam

What does Mr. Traveler obtain when using a $10,000 note and T.D. as security for a $4,000 loan in a negotiated pledge agreement with Mr. Banks?

1. Collateral

2. Funds

3. Insurance

4. Security

The correct answer is: Collateral

In the context of a negotiated pledge agreement, Mr. Traveler offers a $10,000 note and other assets as security for a $4,000 loan from Mr. Banks. In this arrangement, the $10,000 note serves as collateral, which is a tangible asset that provides security to the lender in case the borrower defaults on the loan. When a borrower pledges collateral, it gives the lender a level of assurance that they can recover the funds in the event of non-payment. This secured arrangement typically lowers the risk for the lender and can lead to more favorable loan terms for the borrower. The pledged assets (in this case, the note and T.D.) could be seized or liquidated by the lender to recover the loan amount if necessary. The other terms provided, such as funds, insurance, and security, do not accurately describe what Mr. Traveler specifically obtains in this scenario. "Funds" refers to the loan amount itself, "insurance" implies a policy providing coverage, and "security" is more general and does not specifically indicate the asset pledged. By identifying the asset being used to guarantee the loan, the term "collateral" distinctly encapsulates the function of the $10,000 note in this financial transaction.