A type of debt-based derivative instrument that provides a much safer investment than asset-backed or mortgaged-backed securities. This bond is secured by the cashflows generated from an underlying investment pool (mortgage loans- collateralized property), or from a public-sector debt with a preferential claim in the event of default. This preferential claim and other safety features such as coverage, asset eligibility, low risk of bankruptcy, etc, are the most common safety aspects in different covered bonds (different in terms of the jurisdiction in which the bond is issued).
Technically, issuance of covered bonds initiates when a bank, for example, buys cash-generating investments, pool them, and issues a bond that is secured by the cash flows from the pooled investments (known as cover pool). The “cover pool” investments are typically composed of mortgage loans or public-sector loans. Covered bonds are popular in Europe, but seldom used in the U.S. market.
Comments