Business Definition for: pledge
pledge
transfer or assignment of assets to secure payment of an obligation. Also called a
security interest
. The borrower assigns an interest in the property to the lender, which becomes a
lien
on the collateral. If the borrower offers stocks, bonds, or other securities as collateral, the lender generally takes possession or is assigned ownership of the collateral until the loan is paid.
See also
margin
,
Regulation T
,
hypothecation
,
perfected lien
Related Terms:
- see gross margin; profit margin.
- partial payment made by an investor to a broker for securities purchased, with the remainder on credit. The broker retains the securities as collateral and charges the investor interest on the money owed. The Federal Reserve Board determines margin requirements. The margin requirement for stocks is higher than that for convertible bonds because of greater risk. Assume that with a margin requirement of 50% (present requirement), 100 shares of XYZ stock are bought at $100 per share. The actual amount invested is $5000, with a margin of $5000 on credit.
- in commodities trading, deposits required by commodities exchanges.
- in accounting, a reference to revenue or profitability. Examples are gross profit margin (gross profit/sales) and profit margin (net income/sales).
the Federal Reserve Bank's regulation governing the amount of credit that may be advanced by brokers and dealers to customers for the purchase of securities.
Banking: pledging property to secure a loan. Hypothecation does not transfer title, but it does transfer the right to sell the hypothecated property in the event of default.
Securities: pledging of securities to brokers as collateral for loans made to purchase securities or to cover short sales, called margin loans. When the same collateral is pledged by the broker to a bank to collateralize a broker's loan, the process is called rehypothecation.
security interest in collateral securing a debt protected from claims by third parties. To properly file a lien and take a security interest in property owned by the borrower, a lender must file the lien with the appropriate legal authority. Perfection of a lien on real estate is accomplished by recording the mortgage deed of trust in public land records of a municipality, such as a town clerk's office.
Perfecting a lien on stocks, bonds, or other assets owned by the borrower (known as personal property, as opposed to real property, or real estate) occurs when the lender files a financing statement listing the type of collateral securing the loan, and its location, in a designated filing place, generally the office of the Secretary of the State or a county recorder's office.
The lender's financing statement gives the lender priority status ahead of creditors filing subsequent liens, and is valid for a five-year period. The filing date is recorded, and the lender's documents are assigned a file number. These documents contain a detailed record of the collateral pledged or taken by the lender, establishing the lender's claim against assets by the borrower in event that the borrower defaults or goes bankrupt.
Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
