An Explanation of Covered Bonds

Covered bonds are debt securities issued by financial institutions and backed by a cover pool or a group of dedicated loans. Investors will have preferential claims over assets included in the cover pool, in case the bond issuer defaults or becomes insolvent. This type of debt security is considered an important low-cost funding instrument that can be used to finance mortgage loans for their clients and, in some cases, to even fund public debt. Furthermore, this type of safe bond usually receives a higher credit rating primarily because of the strict regulations applied when issuing this type of security.

Duration

The duration of this type of bond is typically longer than other types of debt securities. Its minimum maturity is two years, but it can also mature in as long as ten years. Investors prefer long-term secured debt instruments because it is more stable and has lower risk of being affected by economic changes.

Yield

Another characteristic that sets this bond apart from other types of securities is its high interest rates. Investors who are risk averse will find covered bonds to be very attractive because they do not only carry a low volatility rate, but they also have a higher yield.

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