A bond is an IOU issued by a company, typically offering a fixed rate of interest and a fixed date for repayment by the issuer. In the event of the issuer going bust, bond holders have a higher priority than, say, shareholders when it comes to getting their money back.
A covered bond is one that is backed by other assets held by the issuer. These may include mortgage loans. The idea is that the interest repayments by mortgagees are used to cover the interest to bondholders. The issuer would typically be a bank or building society.
In the event of the bankruptcy of the issuer, a covered bondholder may also have first recourse to the underlying mortgage assets.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Another way to describe a covered bond is 'securitised' the bond's cash flows are secured on other assets, here mortgage loans.
See Tim Bennett's video tutorial: Bond basics.
-
British Airways revamps Avios scheme bringing down flight prices to £1With the new Avios part-payments scheme you can now bag a British Airways flight for as little as £1
-
RBS to close a fifth of branchesRoyal Bank of Scotland plans to shut 18 branches across Scotland, resulting in the loss of 105 jobs. We have the full list of closures.
