<PAGE>

                                                                     EXHIBIT 4.2

                         IRREVOCABLE SECURITY AGREEMENT
                        OF MGM GRAND HOTEL FINANCE CORP.
                      REGARDING DEFEASANCE AND REDEMPTION

          $220,000,000 PRINCIPAL AMOUNT MGM GRAND HOTEL FINANCE CORP.
                   11-3/4% FIRST MORTGAGE NOTES DUE 1999 AND

          $253,000,000 PRINCIPAL AMOUNT MGM GRAND HOTEL FINANCE CORP.
                       12% FIRST MORTGAGE NOTES DUE 2002


     IRREVOCABLE SECURITY AGREEMENT OF MGM GRAND HOTEL FINANCE CORP. REGARDING
DEFEASANCE AND REDEMPTION dated as of July 1, 1996 among (i) MGM GRAND, INC., a
Delaware corporation  (the "Borrower"), (ii) MGM GRAND HOTEL FINANCE CORP., a
                            --------
Nevada corporation ("MGM Finance"), (iii) BANK OF AMERICA NATIONAL TRUST AND
                     -----------
SAVINGS ASSOCIATION, as Agent (in such capacity, the "Credit Agent") for the
                                                      ------------
Banks (defined below) under the Credit Agreement (defined below), (iv) FIRST
TRUST OF ILLINOIS, NATIONAL ASSOCIATION, a national banking association ("First
                                                                          -----
Trust"), as agent for the Trustee and the Credit Agent hereunder (the "Secured
-----                                                                  -------
Lenders' Agent"), and (v) U.S. TRUST COMPANY OF CALIFORNIA, N.A., as Trustee
--------------
under the Indenture (defined below).

                             PRELIMINARY STATEMENTS

     (1) Pursuant to that certain Indenture dated as of May 1, 1992 (as
supplemented, amended or otherwise modified from time to time, the "Indenture",
                                                                    ---------
the terms defined therein and not otherwise defined herein being used herein as
therein defined) by and among (i) MGM Finance, as issuer, (ii) the Borrower, as
guarantor, (iii) MGM Grand Hotel, Inc., a Nevada corporation (the "Company") as
                                                                   -------
obligor under certain covenants therein, and (iv) U.S. Trust Company of
California, N.A., a national banking association, as trustee (the "Trustee"),
                                                                   -------
MGM Finance has issued $220,000,000 principal amount of its 11-3/4% First
Mortgage Notes due 1999 and $253,000,000 principal amount of its 12% First
Mortgage Notes due 2002 (collectively, the "First Mortgage Notes").
                                            --------------------

     (2) Pursuant to the Loan Agreement, dated as of July 1, 1996 (as
supplemented, amended or otherwise modified from time to time, the "Loan
                                                                    ----
Agreement"), by and among the Borrower, the lenders from time to time party
---------
thereto, Bank of Scotland, Societe Generale, the Long-Term Credit Bank of Japan,
Ltd., Wells Fargo Bank, N.A., and CIBC, Inc., as Co-Agents, and Bank of America
National Trust and Savings Association, as Administrative Agent, the lenders
party thereto have agreed to extend the credit facilities described therein to
the Borrower.

     (3) Pursuant to the Credit Agreement, dated as of May 13, 1992 (as
supplemented, amended or otherwise modified from time to time, the "Credit
                                                                    ------
Agreement"), by and among MGM Finance, the Company, the financial institutions
---------
from time to time

<PAGE>

party thereto (collectively, the "Banks", and individually, a "Bank") and Bank
                                  -----                        ----
of America National Trust and Savings Association, as Agent for the Banks
thereunder, such Banks have agreed to extend the credit facilities in an amount
not to exceed $60,000,000 described therein to MGM Finance and the Company.

     (4) MGM Finance has established two securities accounts with First Trust at
its office at 410 North Michigan Avenue, Suite 370, Chicago, Illinois  60611,
each in the name of MGM Finance and each subject to the terms of this Agreement.
The first such securities account has been designated "MGM Finance Defeasance
Account pledged to U.S. Trust Company of California, N.A., as Trustee" (the "MGM
                                                                             ---
Finance Defeasance Account").  The second such securities account has been
--------------------------
designated "MGM Finance Securities Account pledged equally and ratably to Bank
of America National Trust & Savings Association, as Credit Agent and to U.S.
Trust Company of California, N.A., as Trustee" (the "MGM Finance Dual Interest
                                                     -------------------------
Account", and, together with the MGM Finance Defeasance Account, the "MGM
-------                                                               ---
Finance Securities Accounts").
---------------------------

     (5) MGM Finance has entered into this Agreement to assign, pledge and
encumber all of MGM Finance's right, title and interest in and to each of the
MGM Finance Securities Accounts and the securities deposited in each thereof in
favor of the Trustee, in order to secure the payment and performance of the
obligations of MGM Finance under the Indenture and the First Mortgage Notes;
provided that until such time as is specified herein, such assignment, pledge
--------
and security interest in the MGM Finance Dual Interest Account and the U.S.
Government Obligations therein shall be equal and ratable as to priority to the
assignment, pledge and security interest created hereby in favor of the Credit
Agent and the Banks.

     (6) The Borrower has entered into the Irrevocable Security Agreement of MGM
Grand, Inc. Regarding Defeasance and Redemption (as supplemented, amended or
otherwise modified from time to time, the "Borrower Defeasance Agreement"), of
                                           -----------------------------
even date herewith, with the Administrative Agent (as defined in the Loan
Agreement), the Credit Agent, the Trustee, the Secured Lenders' Agent and MGM
Finance, to assign, pledge and encumber all of the Borrower's right, title and
interest in and to the Securities Accounts (as defined in the Borrower
Defeasance Agreement) and the U.S. Government Obligations deposited therein in
favor of the Trustee, in order to secure the payment and performance of the
obligations of MGM Finance under the Indenture and the First Mortgage Notes.

     (7) MGM Finance, the Company and the Borrower (collectively, the "MGM Grand
                                                                       ---------
Parties") may terminate all of their obligations under the Indenture (except MGM
-------
Finance's obligations under Section 7.07 thereof), pursuant to and on the terms
and conditions set forth in Article 8 of the Indenture, which Article provides
for the defeasance of the First Mortgage Notes.  In furtherance of such
defeasance, the Borrower (pursuant to the Borrower Defeasance Agreement) and MGM
Finance (pursuant hereto) intend to deposit with the Secured Lenders' Agent for
the benefit of the Trustee U.S. Government Obligations in amounts sufficient
under Article 8 to defease the First Mortgage Notes.

                                       2
<PAGE>

     NOW, THEREFORE, in consideration of the premises the parties hereto hereby
agree as follows:

     SECTION 1.  Grant for the Benefit of the Banks.  MGM Finance hereby assigns
                 ----------------------------------
and pledges to the Credit Agent for its benefit and the ratable benefit of the
Banks, and hereby grants to the Credit Agent for its benefit and the ratable
benefit of the Banks a security interest in, the following (collectively, the

"Bank Collateral"):
----------------

     (a)  the MGM Finance Dual Interest Account and all U.S. Government
Obligations contained or deposited in the Dual Interest Account from time to
time, and any certificates representing any thereof, and all cash, instruments
and other property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all thereof; and

     (b)  all proceeds of any and all of the foregoing Bank Collateral
(including, without limitation, proceeds that constitute property of the types
described above in Section 1(a)).

     SECTION 2.  Grant for the Benefit of the Trustee.  The Borrower hereby
                 ------------------------------------
assigns and pledges to the Trustee for its benefit and the benefit of the
Holders, and hereby grants to the Trustee for its benefit and the benefit of the
Holders a security interest in, the following (collectively, and including,
without limitation, all property constituting Bank Collateral, the
"Collateral"):
 ----------

     (a)  the MGM Finance Securities Accounts and all U.S. Government
Obligations contained or deposited in either MGM Finance Securities Account from
time to time, and any certificates representing any thereof, and all cash,
instruments and other property from time to time received, receivable or
otherwise distributed in respect of or in exchange for any or all thereof; and

     (b)  all proceeds of any and all of the foregoing Collateral (including,
without limitation, proceeds that constitute property of the types described
above in Section 2(a)).

     SECTION 3.  Agreement to Defease and Redeem First Mortgage Notes.
                 ----------------------------------------------------

     (a)  On or before July 3, 1996 (the "Delivery Date") MGM Finance shall
                                          -------------
deliver to the Secured Lenders' Agent as Collateral in the manner provided in
Section 4 below, U.S Government Obligations maturing as to principal and
interest in such amounts and at such times as is, together with the Grantor
Defeasance Deposit (as defined in the Borrower Defeasance Agreement) sufficient,
without consideration of the reinvestment of interest and after payment of all
federal, state and local taxes or other charges or assessments in respect
thereof payable by the Trustee, to pay principal of and interest on the First
Mortgage Notes to May 1, 1997 (the "Redemption Date"), and to pay all other sums
                                    ---------------
payable by it under the Indenture (such amount of such U.S. Government
Obligations so delivered being referred

                                       3
<PAGE>

to herein as the "MGM Finance Defeasance Deposit", and, together with the
                  ------------------------------
Grantor Defeasance Deposit, the "Defeasance Deposit"). On or before the Delivery
                                 ------------------
Date MGM Finance shall deliver to the Trustee an Officer's Certificate
certifying that the Defeasance Deposit is and will be sufficient to pay all such
principal, interest and other amounts, as required by Section 8.01(a) of the
Indenture.

     (b)  MGM Finance shall cause all of the First Mortgage Notes to be redeemed
on May 1, 1997 pursuant hereto and to the optional redemption provisions of
paragraph 5 of each First Mortgage Notes and Section 3.07 of the Indenture.

     (c)  The Trustee hereby agrees:

          (i)    That delivery of a Defeasance Deposit by the Borrower and MGM
     Finance to the Secured Lenders' Agent pursuant to and complying with the
     terms hereof and the Borrower Defeasance Agreement will satisfy MGM
     Finance's obligation to deposit U.S. Government Obligations with the
     Trustee under Section 8.01(a) of the Indenture;

          (ii)   That possession by the Secured Lenders' Agent on the ninety-
     first day following the Delivery Date or such later date on which the
     conditions of Section 8.01 of the Indenture shall be satisfied (the
     "Defeasance Date") of a Defeasance Deposit complying with the requirements
      ---------------
     of Section 8.01(a) of the Indenture, of the Borrower Defeasance Agreement
     and hereof shall be deemed to satisfy the obligation of MGM Finance to
     deposit the redemption price of all First Mortgage Notes under Section 3.05
     of the Indenture as of the Defeasance Date provided the assignment, pledge
                                                --------
     and security interest created hereunder in favor of the Trustee and Holders
     in all of the U.S. Government Obligations included in the Collateral shall
     then be valid, perfected and first priority;

          (iii)  To provide, in MGM Finance's name and at MGM Finance's expense,
     notice of the redemption of the First Mortgage Notes to each Holder before
     the Redemption Date as provided in Section 3.03 of the Indenture;

          (iv)   To use the proceeds of the Collateral to redeem all of the then
     outstanding First Mortgage Notes on the Redemption Date in accordance with
     the Indenture;

          (v)    After redemption of the First Mortgage Notes and payment of all
     other amounts required to be paid in connection with such redemption under
     the Indenture, to remit any Collateral or proceeds thereof then remaining
     to the Borrower provided, that with respect to the Bank Collateral, the
                     --------
     assignment, pledge and security interest granted under Section 1 hereof in
     the Bank Collateral shall then have terminated;

                                       4
<PAGE>

          (vi)   Delivery to the Trustee of an opinion of Christensen, White,
     Miller, Fink, Jacobs, Glaser & Shapiro substantially in the form of Exhibit
     A hereto shall satisfy the requirement for the delivery of the Opinion of
     Counsel required by Sections 8.01(d), (e), (f) and (g) of the Indenture;

          (vii)  Delivery to the Trustee of an Officer's Certificate
     substantially in the form of Exhibit B hereto shall satisfy the requirement
     for the delivery of the Officer's Certificate required by Section 8.01(g)
     of the Indenture; and

          (viii) On each of the Defeasance Date and the Redemption Date the
     Trustee shall acknowledge to the Borrower and MGM Finance in writing the
     discharge of their respective obligations under the Indenture, except for
     those then surviving obligations as specified in Section 8.01 of the
     Indenture.

     SECTION 4.  Delivery of Collateral.
                 ----------------------

     (a)  All certificates or instruments representing or evidencing Collateral
(if any) shall be delivered to and held by the Secured Lenders' Agent pursuant
hereto and shall be in suitable form for transfer by delivery, or shall be
accompanied by duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to the Secured Lenders' Agent.

     (b)  With respect to any Collateral the ownership of which is recorded in
book-entry form by a Federal Reserve Bank, MGM Finance shall cause such
Collateral to be irrevocably transferred to and maintained in a custody account
with such Federal Reserve Bank in the book entry records of such Federal Reserve
Bank in the name of First Bank National Association, as agent for First Trust as
Secured Lenders' Agent.  MGM Finance shall also deliver to the Secured Lenders'
Agent and the Credit Agent a listing of such Collateral by title (or series),
unpaid principal amount and maturity.  Each such listing of Collateral shall be
accompanied by written instructions of MGM Finance to the Secured Lenders' Agent
directing that each item of listed Collateral be deposited and maintained in the
MGM Finance Securities Account specified therein.  The Secured Lenders' Agent
shall cause each item of listed Collateral delivered to it to be deposited and
maintained in the MGM Finance Securities Account specified therefor, subject to
the Liens, terms and conditions hereof.  The Secured Lenders' Agent shall
cooperate with MGM Finance in effecting each such delivery of Collateral, and
upon the date of the completion of each transfer to its custodial account with
the appropriate Federal Reserve Bank, the Secured Lenders' Agent shall notify
each of the MGM Finance, Trustee and Credit Agent that it has received and holds
such Collateral for the account of MGM Finance in the appropriate MGM Finance
Securities Account, and subject to the Liens, terms and conditions hereof.  The
Secured Lenders' Agent shall cause all relevant records respecting such U.S.
Government Obligations delivered to it to be maintained in the name of First
Trust as Secured Lenders' Agent in order to reflect and perfect the respective
interests of the MGM Finance, the Credit Agent and the Trustee therein, in each
case in a manner required by

                                       5
<PAGE>

and consistent with applicable law (including United States regulations
applicable to perfection of security interests in such U.S. Government
Obligations). U.S. Government Obligations so delivered under this Section 4(b)
are securities of the United States Treasury, such delivery shall be made by
wire transfer to ABA #091000022, FIRST MPLS/TRUST, Account #03, or to such other
account as the Secured Lenders' Agent may specify in writing. The Secured
Lenders' Agent shall, promptly upon its receipt of any U.S. Government
Obligations hereunder place them in the appropriate MGM Finance Securities
Account. The execution and delivery of this Agreement shall constitute
acknowledgement by, and notification of, the Secured Lenders' Agent as if it
were bailee of the Collateral with notice of the assignment, pledge and security
interests created hereby to the full extent contemplated by 31 C.F.R. section
306.118 and Article 8 of the Uniform Commercial Code of any jurisdiction.

     (c)  All deliveries of Collateral hereunder shall be irrevocable and, for
the purposes of the Indenture, shall be deemed to constitute irrevocable deposit
of such Collateral by MGM Finance with the Trustee.

     (d)  Notwithstanding anything to the contrary appearing in the MGM Finance
Collateral Assignment (including, without limitation, Section 6(a) thereof), the
Intercreditor Agreement, the MGM Hotel Loan Agreement, the MGM Hotel Promissory
Note or any other Collaterally Assigned Document, the Company may prepay all or
any portion of the MGM Hotel Loan on the Delivery Date provided (i) the proceeds
                                                       --------
of such prepayment are applied exclusively to the purchase of U.S. Government
Obligations and (ii) immediately upon MGM Finance's purchase of such U.S.
Government Obligations, MGM Finance shall deliver such U.S. Government
Obligations to the Secured Lenders' Agent as Collateral to be deposited and
maintained as Bank Collateral in the MGM Finance Dual Interest Account.  MGM
Finance shall not be required to deliver to the Secured Lenders' Agent for
deposit in the MGM Finance Dual Interest Account as Bank Collateral any U.S.
Government Obligations not acquired with the proceeds of prepayments of the MGM
Hotel Loan.

     SECTION 5.  Security for Obligations.
                 ------------------------

     (a)  The assignment, pledge and security interest in the Bank Collateral
granted under Section 1 hereof secure the prompt payment, in full in cash, and
the full performance of, all Obligations (as defined in the Credit Agreement) of
MGM Finance under the Credit Agreement and the Loan Documents (as defined in the
Credit Agreement) (collectively, the "Credit Obligations"), including, without
                                      ------------------
limitation, all interest that accrues on all or any part of any of such Credit
Obligations the filing of any petition or pleading against Borrower or any other
Person for a proceeding under any Debtor Relief Laws (as defined in the Loan
Agreement).

     (b)  The assignment, pledge and security interest in the Collateral granted
under Section 2 hereof secure the prompt payment, in full in cash, and the full
performance of,

                                       6
<PAGE>

all obligations of MGM Finance to the Trustee and the Holders under the
Indenture and the First Mortgage Notes, whether for principal, interest, fees,
expenses or otherwise, including, without limitation, all interest that accrues
on all or any part of any of such obligations of MGM Finance after the filing of
any petition or pleading against MGM Finance or any other Person for a
proceeding under any Debtor Relief Laws (collectively, the "Indenture
                                                            ---------
Obligations", and, together with Credit Obligations, the "Secured Obligations").
-----------                                               -------------------

     SECTION 6.  Representations and Warranties.
                 ------------------------------

     (a)  MGM Finance represents and warrants to and for the benefit of the
Credit Agent and the Banks as follows:

          (i)    MGM Finance is the legal and beneficial owner of the Bank
     Collateral free and clear of any Lien, except for the assignment, pledge
     and security interest created by this Agreement.

          (ii)   This Agreement and the pledge of the Bank Collateral pursuant
     hereto create a valid and perfected security interest in the Bank
     Collateral, securing the payment of Indenture Obligations. Such security
     interest is equal and ratable as to priority to the Lien created by Section
     2 hereof, and is otherwise first priority.

          (iii)  No consent of any other Person and no authorization, approval
     or other action by, and no notice to or filing with, any governmental
     authority or regulatory body or other third party is required either (x)
     for the grant by MGM Finance of the assignment and security interest
     granted hereby, for the pledge by MGM Finance of the Bank Collateral
     pursuant hereto or for the execution, delivery or performance of this
     Agreement by MGM Finance, or (y) for the perfection or maintenance of the
     pledge, assignment and security interest created hereby over the Bank
     Collateral (including the priority nature of such pledge, assignment or
     security interest as described in clause (ii) above), except as may be
     required in connection with the disposition thereof by laws affecting the
     offering and sale of securities generally. This Agreement has been duly
     authorized, executed and delivered by, and is the legal, valid and binding
     obligation of, each of MGM Finance and Borrower, enforceable against each
     such MGM Party in accordance with its terms.

          (iv)   There are no conditions precedent to the effectiveness of this
     Agreement that have not been satisfied or waived.

          (v)    There is no action, suit, investigation, litigation or
     proceeding affecting Borrower or MGM Finance pending or threatened before
     any court, governmental agency or arbitrator that purports to affect the
     legality, validity or enforceability of this Agreement or the consummation
     of the transactions contemplated hereby or whose resolution could

                                       7
<PAGE>

     have a material adverse affect on the ability of either such party to
     perform its obligations hereunder.

          (vi)   No Event of Default has occurred and is continuing, and neither
     this Agreement nor the consummation of the transactions contemplated hereby
     shall cause or result in a Default under the Indenture or a breach or
     violation of, or constitute a default under, any other agreement instrument
     to which MGM Finance is a party or by which it or its property is bound.

     (b)  MGM Finance represents and warrants to and for the benefit of the
Secured Lenders' Agent, the Trustee and the Holders as follows:

          (i)    MGM Finance is the legal and beneficial owner of the Collateral
     free and clear of any Lien, except for the assignments, pledges and
     security interests created by this Agreement.

          (ii)   This Agreement and the pledge of the Collateral pursuant hereto
     create a valid and perfected security interest in the Collateral securing
     the payment of the Indenture Obligations. Such security interest is first
     priority with respect to all Collateral other than Bank Collateral. With
     respect to the Bank Collateral, such security interest is equal and ratable
     as to priority to the Lien created by Section 1 hereof, and is otherwise
     first priority.

          (iii)  No consent of any other Person and no authorization, approval
     or other action by, and no notice to or filing with, any governmental
     authority or regulatory body or other third party is required either (x)
     for the grant by MGM Finance of the assignment and security interest
     granted hereby, for the pledge by MGM Finance of the Collateral pursuant
     hereto or for the execution, delivery or performance of this Agreement by
     MGM Finance, or (y) for the perfection or maintenance of the pledge,
     assignment and security interest created hereby over the Collateral
     (including the priority nature of such pledge, assignment or security
     interest as described in clause (ii) above), except as may be required in
     connection with the disposition thereof by laws affecting the offering and
     sale of securities generally.

          (iv)   There are no conditions precedent to the effectiveness of this
     Agreement that have not been satisfied or waived.

          (v)    There is no action, suit, investigation, litigation or
     proceeding affecting either MGM Finance or Borrower pending or threatened
     before any court, governmental agency or arbitrator that purports to affect
     the legality, validity or enforceability of this Agreement or the
     consummation of the transactions contemplated hereby or whose resolution
     could have a material adverse affect on the ability of either such party to
     perform its obligations hereunder.

                                       8
<PAGE>

          (vi)   No Event of Default has occurred and is continuing, and neither
     this Agreement nor the consummation of the transactions contemplated hereby
     shall cause or result in a Default under the Indenture or a breach or
     violation of, or constitute a default under, any other agreement instrument
     to which MGM Finance is a party or by which it or its property is bound.

     SECTION 7.  Further Assurances.  MGM Finance agrees that from time to time,
                 ------------------
at the expense of MGM Finance, MGM Finance will promptly execute and deliver all
further instruments and documents (including the filing and recording of any
necessary financing statements), and take all further action, that may be
necessary or desirable, or that the Credit Agent, Trustee or Secured Lenders'
Agent may request, in order to perfect and protect any pledge, assignment or
security interest granted or purported to be granted hereby or to enable the
Credit Agent, Trustee and Secured Lenders' Agent to exercise and enforce their
respective rights hereunder.  MGM Finance shall pay all taxes, assessments and
other charges with respect to the Collateral, and will defend the Collateral
against any suit, action or proceeding which could adversely affect the
assignment, pledge and security interest created hereby.

     SECTION 8.  Interest and Distributions; Reinvestment of MGM Finance
                 -------------------------------------------------------
Securities Accounts.  (a)  The Secured Lenders' Agent shall be entitled to
-------------------
receive and retain any and all interest and other distributions paid in respect
of Bank Collateral and Collateral as additional Bank Collateral and Collateral,
respectively, subject to the Lien and terms hereof.  All interest and
distribution payments that are received by MGM Finance contrary to the
provisions of this Section 8 shall be received in trust for the benefit of the
Secured Lenders' Agent, shall be segregated from other funds of MGM Finance and
shall be forthwith paid over to the Secured Lenders' Agent as Collateral.

     (b)  All amounts maintained in either of the MGM Finance Securities
Accounts, including all amounts paid in respect of interest and other
distributions on Bank Collateral and Collateral which are retained by the
Secured Lenders' Agent, shall be invested in U.S. Government Obligations with
respect to which the requirements of Sections 4(a) or (b), and Section 7, have
been satisfied.

     SECTION 9.  Transfers and Other Liens.  MGM Finance shall not (i) sell,
                 -------------------------
assign (by operation of law or otherwise) or otherwise dispose of, or grant any
option with respect to, any of the Collateral, except that MGM Finance may
assign its interests in the Collateral to the Company at any time after the
Defeasance Date provided that the Collateral remains subject to the assignments,
pledges and security interests created hereby,or (ii) create or suffer to exist
any Lien upon or with respect to any of the Collateral except for the pledge,
assignment and security interest created by this Agreement.

     SECTION 10. Secured Lenders' Agent Appointed Attorney-in-Fact.  MGM Finance
                 -------------------------------------------------
hereby irrevocably appoints the Secured Lenders' Agent MGM Finance's attorney-
in-fact, with full authority in the place and stead of MGM Finance and in the
name of MGM

                                       9
<PAGE>

Finance or otherwise, from time to time in the Secured Lenders' Agent's
discretion, to take any action and to execute any instrument necessary to
accomplish the purposes of this Agreement.

     SECTION 11. Secured Lenders' Agent May Perform.  If MGM Finance fails to
                 ----------------------------------
perform any agreement contained herein, the Secured Lenders' Agent may itself
perform, or cause performance of, such agreement, and the expenses of the
Secured Lenders' Agent incurred in connection therewith shall be payable by MGM
Finance.

     SECTION 12. The Secured Lenders' Agent's Duties.  The Trustee (on its own
                 -----------------------------------
behalf and on behalf of the Holders) hereby appoints Secured Lenders' Agent as
their agent to act for and on its behalf, but only upon its direction, in
connection with the exercise and enforcement of their rights and remedies
hereunder in accordance with the terms hereof, including, without limitation,
for the purposes of perfection of the assignment, pledge and security interest
created hereby in favor of the Trustee and the Holders.  The Credit Agent (on
its own behalf and on behalf of the Banks) hereby appoints Secured Lenders'
Agent as their agent to act for and on its behalf, but only upon its direction,
in connection with the exercise and enforcement of their rights and remedies
hereunder in accordance with the terms hereof, including, without limitation,
for the purposes of perfection of the assignment, pledge and security interest
created hereby in favor of the Credit Agent and the Banks.  The powers conferred
on the Secured Lenders' Agent hereunder are solely to protect the assignments,
pledges and security interests in the Collateral, including the Bank Collateral,
and shall not impose any duty upon it to exercise any such powers.  Except for
the safe custody of any Collateral in its possession and the accounting for
moneys actually received by it hereunder, the Secured Lenders' Agent shall have
no duty as to any Collateral, as to ascertaining or taking action with respect
to calls, conversions, exchanges, maturities, tenders or other matters relative
to any Security Collateral, whether or not the Secured Lenders' Agent has or is
deemed to have knowledge of such matters, or as to the taking of any necessary
steps to preserve rights against any parties or any other rights pertaining to
any Collateral.  The Secured Lenders' Agent shall be deemed to have exercised
reasonable care in the custody and preservation of any Collateral in its
possession if such Collateral is accorded treatment substantially equal to that
which First Trust accords its own property.

     SECTION 13. Release and Termination.
                 -----------------------

     (a)  On the Defeasance Date, and upon (i) the payment in full and in cash
of all amounts outstanding under the Credit Agreement, together with any amounts
of interest then accrued thereon, and (ii) termination of the Commitment (as
defined in the Credit Agreement), the Credit Agent shall notify the Secured
Lenders' Agent that, concurrently with the release and termination of all
collateral and guarantees held by the Secured Lenders' Agent for the First
Mortgage Notes and the Credit Agreement (other than the liens in the MGM Finance
Securities Accounts created hereunder), the assignment, pledge and security
interest created hereunder or pursuant hereto for the benefit of the Banks or
the Credit Agent, all rights of any Bank or the Credit Agent with in or respect
of any Bank

                                       10
<PAGE>

Collateral, and all other rights of any Bank or the Credit Agent hereunder, have
been terminated. Such notice and the notice of the Credit Agent to the Secured
Lenders' Agent contemplated by Section 13(b) below are each referred to herein
as a "Collateral Notice". Upon such termination, the Credit Agent shall, at MGM
      -----------------
Finance's expense, execute and deliver to MGM Finance such documents as MGM
Finance shall reasonably request to evidence the release of any Bank Collateral
from the assignment, pledge and security interest granted to the Credit Agent
and the Banks hereby, regardless of whether at the time of such request or such
release any Event of Default or Credit Agreement Event of Default (defined
below) shall have occurred and be continuing.

     (b)  Without limitation to the foregoing Section 13(a), upon the later of
payment in cash and in full of the Credit Obligations and the termination in
full of all Commitments (as defined in the Credit Agreement), the pledge,
assignment and security interest granted hereby in the Bank Collateral shall
terminate.  Upon any such termination, the Credit Agent will, at MGM Finance's
expense, execute and deliver to MGM Finance such documents as MGM Finance shall
reasonably request to evidence such termination and shall promptly notify the
Secured Lenders' Agent that the assignment, pledge and security interest created
by Section 1 hereof have terminated.

     (c)  The term of this Agreement shall commence upon its execution and
delivery and shall terminate when the First Mortgage Notes have been paid and
discharged in accordance with the Indenture and the assignment, pledge and
security interest granted to the Credit Agent and the Banks under Section 1
hereof shall have terminated pursuant to Sections 13(a) or (b) above.  Upon
termination of this Agreement each assignment, pledge and security interest
created hereunder shall terminate and be released.

     SECTION 14. Certification of Defeasance and Reconveyance of Deeds of Trust
                 --------------------------------------------------------------
and Release of Collateral Related to the Defeased First Mortgage Notes.  On the
----------------------------------------------------------------------
Defeasance Date the Trustee shall execute and deliver to the addressees thereof
the Certificate of Defeasance in the form attached hereto as Exhibit C.  In
addition, the Credit Agent and Trustee shall, and shall cause the Secured
Lender's Agent to, reconvey and release all Collaterally Assigned Documents and
all other guaranties, mortgages, deed of trust, security agreement, pledge,
assignments and any other document and instrument securing or supporting the
Indenture, the First Mortgage Notes, the Indenture Obligations, the Credit
Obligations, any Loan Document (as defined in the Credit Agreement) or any of
the foregoing, in each case by execution, delivery and recordation by the
Trustee of such instruments and agreements of reconveyance and release as may be
reasonably requested by MGM Finance, Borrower or the Trustee.

     SECTION 15. Remedies for the Benefit of the Banks and Credit Agent.
                 ------------------------------------------------------
Subject in each case to the terms of Section 17 hereof, upon the occurrence and
continuation of an "Event of Default" under and as such term is defined in the
Credit Agreement (a "Credit Agreement Event of Default"):
                     ---------------------------------

                                       11
<PAGE>

     (a)  The Credit Agent may exercise, or cause the Secured Lenders' Agent to
exercise, in respect of the Bank Collateral, in addition to other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party upon default under the Uniform Commercial Code in
effect in the State of Nevada at such time (the "Uniform Commercial Code")
                                                 -----------------------
(whether or not the Uniform Commercial Code applies to the affected Bank
Collateral) and also may without notice except as specified below, sell the Bank
Collateral or any part thereof in one or more parcels at public or private sale,
at any of the Secured Lenders' Agent's offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as the Secured Lenders' Agent
may deem commercially reasonable.  MGM Finance agrees that, to the extent notice
of sale shall be required by law, at least ten days' notice to MGM Finance of
the time and place of any public sale or the time after which any private sale
is to be made shall constitute reasonable notification.  Neither the Credit
Agent nor the Secured Lenders' Agent shall be obligated to make any sale of Bank
Collateral regardless of notice of sale having been given.  Any public or
private sale may be adjourned from time to time by announcement at the time and
place fixed therefor, and such sale may, without further notice, be made at the
time and place to which it was so adjourned.

     (b)  All cash proceeds received in respect of any sale of, collection from,
or other realization upon all or any part of the Bank Collateral may, in the
discretion of the Secured Lenders' Agent, be held by the Secured Lenders' Agent
as collateral for, and/or then or at any time thereafter applied in whole or in
part by the Credit Agent for the ratable benefit of the Banks against, all or
any part of Credit Obligations in such order as the Credit Agent shall elect,
subject to the terms of Section 17 hereof.  Any surplus of such cash or cash
proceeds held by the Secured Lenders' Agent or the Credit Agent and remaining
after payment in full of all Indenture Obligations shall be held by the Secured
Lenders' Agent as Collateral pursuant to the terms hereof.

     SECTION 16. Remedies for the Benefit of the Trustee.  Subject in each case
                 ---------------------------------------
to the provisions of Section 17 hereof, upon the occurrence and continuation of
an Event of Default under the Indenture:

     (a)  The Trustee may cause the Secured Lenders' Agent to exercise in
respect of the Collateral, in addition to other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a secured
party upon default under the Uniform Commercial Code (whether or not the Uniform
Commercial Code applies to the affected Collateral) and also may without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Secured Lenders' Agent's
offices or elsewhere, for cash, on credit or for future delivery, and upon such
other terms as the Secured Lenders' Agent may deem commercially reasonable. MGM
Finance agrees that, to the extent notice of sale shall be required by law, at
least ten days' notice to MGM Finance of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification. The Secured Lenders' Agent shall not be obligated to
make any sale of Collateral regardless of notice

                                       12
<PAGE>

of sale having been given. The Secured Lenders' Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.

     (b)  All cash proceeds received by the Secured Lenders' Agent in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Trustee, be held by the Secured
Lenders' Agent as collateral for, and/or then or at any time thereafter applied
in whole or in part by the Trustee against, all or any part of the Indenture
Obligations in accordance with the Indenture and hereof.  Any surplus of such
cash or cash proceeds held by the Secured Lenders' Agent and remaining after
payment in full of all the Indenture Obligations shall be paid over to MGM
Finance or to whomsoever may be lawfully entitled to receive such surplus.

     SECTION 17. Equal and Ratable Liens on Bank Collateral.
                 ------------------------------------------

     Notwithstanding the date, manner or order of attachment or perfection or
the description of any Bank Collateral or security interests, liens, claims or
encumbrances covered or granted hereby with respect to the Bank Collateral, the
assignment, pledge and security interest granted in the Bank Collateral under
Section 2 hereof shall be in all respects equal and ratable to and rank equally
with the assignment, pledge and security interest granted in the Bank Collateral
under Section 1 hereof, except as specified in Section 13 hereof.  The Credit
Agent and the Banks shall have at all times an interest equal to that of the
Secured Lenders' Agent and Trustee in the Bank Collateral, except as specified
in Section 13 hereof.  All proceeds from any exercise of rights by the Trustee,
the Credit Agent or the Secured Lenders Agent with respect to any Bank
Collateral hereunder shall be paid to or retained by the Secured Lenders' Agent
and applied in accordance with the terms of the Intercreditor Agreement as if
such proceeds were proceeds of an exercise of rights under a Collateral Document
(as defined in the Intercreditor Agreement).

     SECTION 18. Responsibilities of Trustee and Secured Lenders' Agent.
                 ------------------------------------------------------

     (a)  Each of the Trustee and the Secured Lenders' Agent undertakes to
perform only such duties as are expressly and specifically set forth in the
Indenture (in the case of the Trustee only) and this Agreement and no implied
duties or obligations shall be read into this Agreement against the Trustee or
the Secured Lenders' Agent.

     (b)  Neither the Trustee nor the Secured Lenders' Agent shall have any
liability hereunder except to the extent of its own gross negligence or willful
misconduct.  In no event shall the Trustee or the Secured Lenders' Agent be
liable for any special, indirect or consequential damages.  Neither the Trustee
nor the Secured Lenders' Agent shall have any duty or responsibility under this
Agreement in the case of any default in the performance of the covenants or
agreements contained in the Indenture.  Neither the Trustee nor the Secured
Lenders' Agent shall be required to resolve conflicting demands to money or
property in its possession under this Agreement.

                                       13
<PAGE>

     (c)  The Trustee and the Secured Lenders' Agent may consult with counsel of
its own choice and the opinion of such counsel shall be full and complete
authorization to take or suffer in good faith any action hereunder in accordance
with such opinion of counsel.

     (d)  Neither the Trustee nor the Secured Lenders' Agent shall be
responsible for any of the recitals or representations contained herein.

     (e)  Either the Trustee or the Secured Lenders' Agent may become the owner
of, or acquire an interest in, any of the First Mortgage Notes with the same
rights that it would have if it were not the Trustee or Secured Lenders' Agent,
respectively.

     (f)  Neither the Trustee nor the Secured Lenders' Agent shall be liable for
the accuracy of any calculations provided as to the sufficiency of the U.S.
Government Obligations deposited hereunder to pay any obligations secured
hereby.

     (g)  Neither the Trustee nor the Secured Lenders' Agent shall be liable for
any action or omission of any each other, any MGM Party or the Credit Agent
under this Agreement or the Indenture.

     (h)  Whenever in the administration of this Agreement the Trustee or
Secured Lenders' Agent shall deem it necessary or desirable that a matter be
proved or established prior to taking or suffering any action thereunder, such
matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of gross negligence or willful misconduct on the
part of the Trustee or Secured Lenders' Agent, respectively, be deemed to be
conclusively proved and established by a certificate of an authorized
representative of MGM Finance and such certificate shall, in the absence of
gross negligence or willful misconduct on the part of the Trustee or the Secured
Lenders' Agent, be full warrant to the Trustee or Secured Lenders' Agent,
Respectively, of any action taken or suffered by it under the provisions of this
Agreement upon the faith thereof.

     (i)  The Trustee and the Secured Lenders' Agent may conclusively rely, as
to the truth and accuracy of the statements and correctness of the opinions and
the calculations, if any, provided to it in connection with this Agreement, and
shall be protected in acting, or refraining from acting, upon any written
notice, instruction, request, certificate, document or opinion furnished to the
Trustee or Secured Lenders' Agent in connection with this Agreement and
reasonably believed by the Trustee or Secured Lenders' Agent, respectively, to
have been signed or presented by the proper party, and it need not investigate
any fact or matter stated in such notice, instruction, request, certificate,
document or opinion.

     (j)  MGM Finance agrees to indemnify the Trustee, its agents and its
officers or employees, and hold the Trustee, its agents, officers or employees
harmless, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever (including, without limitation,
reasonable fees and disbursements of counsel for the Trustee) which may

                                       14
<PAGE>

be imposed on, incurred by, or asserted against the Trustee at any time by
reason of the performance of its duties as Trustee in any transaction arising
out of this Agreement, or any of the transactions contemplated herein or in the
Indenture, unless due to the Trustee's or its officers' or employees' or agents'
negligence or willful misconduct.

     (k)  The Secured Lenders' Agent shall distribute funds from the Securities
Accounts to the Trustee, to the extent such funds are available for application
to payments of principal and interest  under the Indenture and the First
Mortgage Notes in accordance with the Schedule attached to the Officer's
Certificate delivered in the form of Exhibit D, or otherwise as directed in
writing by the Trustee.

     SECTION 19. Resignation and Merger.
                 ----------------------

     (a)  The Trustee may resign and be discharged of its duties hereunder in
accordance with the procedures in the Indenture, if and at such time as the
Trustee shall resign or be discharged as the Trustee under the Indenture.  Any
successor Trustee under the Indenture shall succeed as the Trustee under this
Agreement.

     (b)  Any company into which the Trustee may be merged or converted or with
which it may be consolidated or any company resulting from any merger,
conversion or consolidation to which it shall be a party or any company to which
the Trustee may sell or transfer all or substantially all of its corporate trust
business, provided such company shall be eligible under this Agreement, shall be
the successor to such Trustee without the execution or filing of any paper or
any further act, notwithstanding anything to the contrary herein.

     (c)  First Trust reserves the right to resign as Secured Lenders' Agent
under this Agreement at any time by giving written notice of its resignation,
specifying the effective date thereof, to the other parties hereto.  Within 30
days after receiving the aforesaid notice, MGM Finance agrees to appoint a
successor Secured Lenders' Agent, reasonably acceptable to the Credit Agent and
the Trustee, to which First Trust may distribute the property then held by it
hereunder, less its fees, costs and expenses.  If a successor Secured Lenders'
Agent has not been appointed hereunder and has not accepted such appointment by
the end of such 30 day period, First Trust may apply to a court of competent
jurisdiction for appointment of a successor Secured Lenders' Agent hereunder,
and the costs, expenses and reasonable attorney's fees which it incurs in
connection with such a proceeding shall be paid by MGM Finance.

     SECTION 20. Successors.
                 ----------

     (a)  If at any time hereafter the Trustee shall resign, be removed, be
dissolved or otherwise become incapable of acting, or shall be taken over by any
governmental official, agency, department or board, the position of Trustee
shall thereupon become vacant.  MGM Finance shall mail notice of any such
vacancy to the Holders.

                                       15
<PAGE>

     (b)  If no appointment of a successor Trustee shall be made pursuant to the
foregoing provisions of this section any Holder, or any retiring Trustee or
Secured Lenders' Agent, respectively, may apply to any court of competent
jurisdiction to appoint a successor Trustee.  Such court may thereupon, after
such notice, if any, as such court may deem proper and prescribe, appoint a
successor Trustee.

     SECTION 21. Limitation of Liability.  The Trustee shall not be liable or
                 -----------------------
responsible because of the failure of any of the other parties of this Agreement
to perform any act required of each of them hereunder or because of the loss of
any moneys arising through the insolvency or the act or default or omission of
any depository, other than itself, in which such moneys shall have been
deposited.  The liability of the Trustee hereunder to make payments due and
payable with respect to the First Mortgage Notes as provided herein is limited
to the availability of amounts on deposit under the Indenture and as Collateral
hereunder.

     SECTION 22. Indemnity and Expenses.
                 ----------------------

     (a)  MGM Finance agrees to indemnify the Secured Lenders' Agent from and
against any and all claims, losses and liabilities growing out of or resulting
from this Agreement (including, without limitation, enforcement of this
Agreement), except claims, losses or liabilities resulting from the Secured
Lenders' Agent's, own gross negligence or willful misconduct as determined by a
final judgment of a court of competent jurisdiction.

     (b)  MGM Finance will upon demand pay to the Secured Lenders' Agent the
amount of any and all reasonable fees and expenses, including the reasonable
fees and expenses of its counsel and of any experts and agents, that the Secured
Lenders' Agent may incur in connection with (i) the custody, preservation, use
or operation of, or the sale of, collection from or other realization upon, any
of the Collateral, or (ii) the failure by MGM Finance to perform or observe any
of the provisions hereof.

     SECTION 23. Security Interests Absolute.  The obligations of MGM Finance
                 ---------------------------
under this Agreement are independent of the Secured Obligations, and a separate
action or actions may be brought and prosecuted against MGM Finance to enforce
this Agreement, irrespective of whether any action is brought against MGM
Finance or whether MGM Finance is joined in any such action or actions.  All
rights of the beneficiaries hereof and the pledge, assignment and security
interest hereunder, and all obligations of MGM Finance hereunder, shall be
absolute and unconditional, irrespective of:

     (a)  any lack of validity or enforceability of the Indenture, any First
Mortgage Note or any Loan Document (as defined in the Loan Agreement) or any
other agreement or instrument relating thereto;

     (b)  any change in the time, manner or place of payment of, or in any other
term of, all or any of the Secured Obligations or any other amendment or waiver
of or any

                                       16
<PAGE>

consent to any departure from the terms of the Indenture, the First Mortgage
Notes or any Loan Document;

     (c)  any taking, exchange, release or non-perfection of any other
collateral, or any taking, release or amendment or waiver of or consent to
departure from any guaranty, for all or any of the Secured Obligations;

     (d)  any manner of application of collateral, or proceeds thereof, to all
or any of the Secured Obligations, or any manner of sale or other disposition of
any collateral for all or any of the Secured Obligations or any other assets of
MGM Finance;

     (e)  any change, restructuring or termination of the corporate structure or
existence of MGM Finance; or

     (f)  any other circumstance that might otherwise constitute a  defense
available to, or a discharge of, MGM Finance or a third party grantor of a
security interest.

     SECTION 24. Redemption or Acceleration of Maturity.  MGM Finance will not
                 --------------------------------------
accelerate the maturity or due date of the First Mortgage Notes to a date
earlier than May 1, 1997.

     SECTION 25. Amendments; Waivers; Etc.   No amendment or waiver of any
                 ------------------------
provision of this Agreement, and no consent to any departure by any party
herefrom, shall in any event be effective unless the same shall be in writing
and signed by the each of the parties hereto, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given.  No failure on the part of any party hereto to exercise, and no
delay in exercising any right hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any such right preclude any other or
further exercise thereof or the exercise of any other right.

     SECTION 26. Addresses for Notices.  All notices and other communications
                 ---------------------
provided for hereunder shall be in writing (including electronic facsimile) and
(a) if to the Trustee, MGM Finance or MGM Finance, to the address provided
therefor under Section 12.10 of the Indenture,  (b) if to the Credit Agent, to
the address provided therefor under Section 11.02 of the Credit Agreement, and
(c) if to the Secured Lenders' Agent, to 410 North Michigan Avenue, Suite 370,
Chicago, Illinois  60611, Attention:  Gwendolyn Carroll, Vice President,
facsimile number 312-836-6757, or, as to each party, to such other address as
such party shall designated in a notice to each of the other parties hereto.

     SECTION 27. Continuing Security Interest; Assignments under the Loan
                 --------------------------------------------------------
Agreement.  This Agreement shall create a continuing security interest in the
---------
Collateral and shall (a) remain in full force and effect except as provided by
Section 13 hereof, (b) be binding upon the parties hereto and their respective
successors, transferees and assigns and (c) inure, together with the rights and
remedies hereunder, to the benefit of the parties hereto and

                                       17
<PAGE>

their respective successors, transferees and assigns. Without limiting the
generality of the foregoing clause (c), any Bank may assign or otherwise
transfer all or any portion of its rights and obligations under the Credit
Agreement (including, without limitation, all or any portion of its Commitment)
to any other Person permitted by the Credit Agreement, and such other Person
shall thereupon become vested with all the benefits in respect thereof granted
to such Bank herein or otherwise, in each case as provided in the Credit
Agreement.

     SECTION 28.  Severability.  If any one or more of the covenants or
                  ------------
agreements provided in this Agreement should be determined by a court of
competent jurisdiction to be contrary to law, such covenants or agreements
herein contained shall be null and void and shall be severed from the remaining
covenants and agreements and shall, in so far as is reasonably possible, not
affect the validity of the remaining provisions of this Agreement.

     SECTION 29. Counterparts.  This Agreement may be executed in several
                 ------------
counterparts, all or any of which shall be regarded for all purposes as
duplicate originals and shall constitute and be but one and the same instrument.

     SECTION 30. Governing Law; Terms.  This Agreement shall be governed by and
                 --------------------
construed in accordance with the laws of the State of Nevada, except to the
extent that the validity or perfection of the security interest hereunder, or
remedies hereunder, in respect of any particular Collateral are governed by the
laws of a jurisdiction other than the State of Nevada.  Unless otherwise defined
herein or in the Indenture, terms used in Article 9 of the Uniform Commercial
Code are used herein as therein defined.

     SECTION 31. Waiver of Jury Trial.  Each party hereto hereby irrevocably
                 --------------------
waives any right to a trial by jury in any action or proceeding arising out of
or relating to this Agreement or the transactions contemplated hereby.

                                       18
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.

MGM GRAND, INC.

By: /s/ Scott Langsner
    ----------------------------
        Scott Langsner


MGM GRAND HOTEL FINANCE CORP.

By: /s/ Daniel H. Scott
    ----------------------------
        Daniel H. Scott


BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
     as Credit Agent

By: /s/ L. Chenevert, Jr.
    ----------------------------
        L. Chenevert, Jr.
        Vice President


FIRST TRUST OF ILLINOIS, NATIONAL ASSOCIATION

By: /s/ G.M. Carroll
    ----------------------------
        G.M. Carroll


U.S. TRUST COMPANY OF CALIFORNIA, N.A.,
     as Trustee

By: /s/ D. Young
    ----------------------------
        D. Young
        Assistant Vice President

                                       19