What is one of the main characteristics of securities backed by collateral?

Securities backed by collateral are primarily characterized by a lower level of risk compared to unsecured securities. This is because the collateral provides a safety net for investors if the issuer defaults. One of the main advantages of collateralized securities is that they typically offer lower yields because of their reduced risk profile.

When it comes to tranching, which refers to the division of a pooled investment into classes that have different risk and return characteristics, it usually pertains to structured finance products, such as collateralized debt obligations (CDOs). By breaking the investment into tranches, it allows for different risk appetites among investors, which can lead to higher returns for those willing to take on more risk.

In summary, while the aspect of tranching can indeed provide investors with opportunities for higher returns based on the risk they are willing to accept, the core characteristic of collateralized securities is that they tend to offer lower overall risk due to the backing they receive from tangible assets. This safety typically translates into more stable returns rather than higher returns. Therefore, focusing on the primary nature of collateral-backed securities reinforces the understanding of their risk-return relationship.