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#fixed #income
Bank guarantees, surety bonds, and letters of credit expose the investor to third-party (or counterparty) risk—that is, the possibility that a guarantor cannot meet its obligations. A cash collateral account mitigates this concern because the issuer immediately borrows the credit-enhancement amount and then invests that amount, usually in highly rated short-term commercial paper. Because a cash collateral account is an actual deposit of cash rather than a pledge of cash, a downgrade of the cash collateral account provider will not necessarily result in a downgrade of the bond issue backed by that provider.
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