Question

Roundwell, Inc. purchases a manufacturing plant for $15 million, by paying $5 million in cash as down payment, and borrowing the remaining $10 million from Home Providence Bank. To secure the loan, Roundwell gives the plant as collateral to Home Providence Bank. What kind of collateral arrangement is in place between Roundwell Motors and Home Providence Bank?

Answer 1

Answer:

A Mortgage

Explanation:

A mortgage is a contract between two parties borrower and lender. In this agreement a bank or any other institution issues a loan against taking an title of an asset as a collateral that will become void if the mortgage is fully paid back with interest. The asset is taken as a security of the mortgage loan. The collateral should a specific asset that can be identifiable. Actual possession may not be transferred to lender only the ownership is transferred in many cases.

In this question the bank is taking a plant as a collateral from Roundwell Inc. against a mortgage loan of $10 million.