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Financial Dictionary - Covered bonds

Covered bonds

overed bondsC are a type of bond issued by financial institutions that offer a fixed return. The guarantee in this type of bonds is the mortgage portfolio of the financial institution that issues them.

What are the main features of covered bonds?

  • The bank issuing the bonds may pre-pay all or part of the issue during their entire life.
  • The regulation stipulates that covered bonds cannot exceed 80% of the eligible portfolio.
  • Covered bonds are usually medium-term issues amortised over a period of between 1 and 3 years.
  • These mortgage-backed securities can be registered, payable to order or payable to bearer.

Who can issue covered bonds?

The issuance of these bonds is restricted to all official credit institutions, savings banks and credit societies.

Financial institutions issue these securities in the form of a public deed to seek financing. They use the received capital to pay the interest resulting from the transaction.

What types of covered bonds are there?

Depending on the guarantees offered, a distinction can be made between two types of covered bonds:

  • Covered bonds with global guarantee: the guarantee is made up of all the bank's mortgage loans, except those that back covered bonds with a special guarantee.
  • Covered bonds with special guarantee: it is made up of a part of the bank's mortgage loans.