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Learn about the following: What fixed rate bonds are and how they work. Some of the key terms used in the market. Why issuers and investors use fixed rate bonds. How fixed rate bonds can be evaluated. The risks fixed income bonds have.
Covered bonds offer both banks and building societies the opportunity to raise much needed long term liquidity at a cost that is lower than that of senior debt. This is because for the investor there is a ring fenced pool of mortgage collateral and this provides enhanced security should the issuer default. It is therefore no surprise that regulators in many countries are keen to encourage covered bond issuance in order to resolve the funding gap that many banks have in their balance sheets.
Regulated covered bond programmes are used by banks and building societies to borrow money in wholesale markets. These programmes are "regulated" because they must comply with the FSA's RCB Sourcebook. When an issuer borrows in the RCB market the bond is the direct obligation of the issuer. However should the issuer default there is a pool of assets that guarantees repayment to the investor. These assets are ring fenced on the issuer's balance sheet and normally comprise residential mortgages. For this reason the debt is considered less risky for investors, it often attracts a rating of AAA which also reduces the funding cost for borrowers.
5th March 2010
A bond is a long term debt obligation. It is sold by the borrower who is called the "issuer" in order to borrow money for the medium and long term. Typically a bond will have a maturity of between 2 and 20 years. The issuer can be a bank, company or government institution. Zero coupon bonds are unusual. They pay the investor no regular interest and although they represent a small proportion of the bond market zero coupon bonds can have advantages for both the issuer and investor.