The concept of covered bonds has existed for about 200 years. This instrument was initiated by Frederick the Great of Prussia (Germany), with the creation of “Pfandbriefe.” The underlying idea was to help project financing. Typically, a bank issuing pfandbriefe bonds would be able to collateralize the bonds with some underlying assets already on its balance sheet.
In simple terms, a covered bond is a financial product whose creditors are benefiting from a pledge. This pledge usually corresponds to mortgage or public sector loans that are on the balance sheet of the issuing bank.
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Posted in Finance, Investment
The credit risk associated with a default-able debt instrument can be decomposed into two components: default risk and recovery risk. The former captures the uncertainty related to a possible default while the latter reflects the uncertainty related to recovery in the case of default.
Default risk can be analyzed from various perspectives. One of these perspectives is provided by the rating approach, in which default risk is quantified by means of a credit rating. These credit ratings are assigned by rating agencies, such as Standard & Poor’s (S&P), Moody’s, and Fitch, and the ratings assigned by these agencies are widely used as default risk indicators by market participants.
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Posted in Finance, Strategy