A covered bond is a type of bond which is secured by collateral held as segregated assets. If bankruptcy or some other hazard prevents the bond issuer from repaying the bond principal, the collateral is used to settle the debt.
Because repayment of the principal of covered bonds is guaranteed, they are far more secure than regular bonds which only represent a debt claim and may become worthless if their issuer becomes insolvent. Because covered bonds are more secure than other types of bonds, credit interest paid out to bond holders as coupon payments is typically lower than that of other bond types.
In Switzerland, covered bonds are typically issued as Pfandbriefe (German) or lettres de gage (French). Swiss Pfandbriefe are issued by the government-mandated Pfandbriefbank on behalf of commercial banks. The principal of this form of covered bond is primarily secured by mortgages. Credit Suisse and UBS issue their own covered bonds (UBS covered bonds are issued by its United Kingdom subsidiary).
The European Covered Bond Council is an association of European covered bond issuers which represents the interests of its members and provides information about covered bonds issued in many European and non-European countries.
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