Based on following information answer question:
Apex Ltd. issued to public ₹10,00,000, 10% Debentures of ₹100 each at par, redeemable at a premium of 20%. It also issued 10,000, 11% Debentures of ₹100 each as collateral security against a bank loan of ₹8,00,000.
The company bought building worth ₹50,00,000 from Beta Ltd. against a cheque of ₹20,00,000 and balance by issue of 12% Debentures of ₹100 each at a premium of 20%.
Which of the following correctly explains the meaning of collateral security?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Additional security mortgaged against a loan, which is put to use only when primary security remains insufficient to cover up default on repayment of loan
A collateral security is a subsidiary or additional security given to the lender besides the primary security. The lender first recovers the loan from the primary security; only if that falls short does the lender use the collateral security. Both parts of the meaning are needed, and only Option (3) gives both.
Option (1) Primary security mortgaged against a loan — Incorrect. The primary security is the main security; collateral security is given in addition to it.
Option (2) Additional security mortgaged against a loan — Incorrect. This is only half the meaning; it leaves out that the collateral security is used only when the primary security is not enough.
Option (4) Any security mortgaged against a loan — Incorrect. This takes in the primary security as well and does not describe collateral security.
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