Tutorial: Covered bonds


What are covered bonds?

Covered bonds are secured, fixed-income debentures such as mortgage and municipal bonds. Their special feature is the fact that on the one hand the issuing bank guarantees for the safety of the bond with its rating. And on the other hand, mortgage bonds are directly collateralised by liens on property and buildings. The value of municipal bonds is secured by claims against the public sector.

Regulated by public law and recommended

Both the issue process and the documentation of the collateral of mortgage and municipal bonds are regulated by law. The collateral of the mortgage bonds is entered into the mortgage register as list of liens. This means that the value of a mortgage bond is covered by real property. Provinces and municipalities are liable for the redemption of a municipal bond with their income from taxes and duties. The steady flow of income of the municipalities represents a safe haven in times of crises. Both kinds of bonds are therefore considered legal investments under Austrian law (Austrian Civil Code).

How do covered bonds work?

Covered bonds generate interest (coupon) payments that are fixed by amount and schedule. At the end of maturity the investor receives 100% of his money back. The invested capital is secured by collateral. Given the high degree of safety, the interest rate is moderate.

Your benefits

Covered bonds are ideal if you are looking for a long-term and very safe form of investment. You like to stay on top of your finances and want to be able to get a precise picture of your assets on the basis of a fixed, constant stream of income at every point in time. You are financially responsible for your offspring or even ward. You wish to invest the disposable capital with a long-term horizon, yet at higher rates of return than offered by a savings book.

Your advantages

  • You benefit from attractive interest payments on your capital.
  • You enjoy a legally protected, very high degree of safety.
  • Income and payment dates are clearly scheduled ahead of time and thus exactly calculable.

Details you should be aware of

  • Between issue date and maturity, price fluctuations are possible, which means that the sale of the bond prior to maturity may result in a loss.
  • The 100% capital redemption only applies to the end of maturity.

How do covered bonds react to...

… rising interest rates?
When interest rates are rising, older mortgage and municipal bonds with lower interest rates lose value. If you sell these bonds prior to maturity, you may record a loss.

… stable interest rates?
In the case of stable interest rates, the price of mortgage and municipal bonds does not change.

… falling interest rates?
When interest rates are falling, older mortgage and municipal bonds with higher interest rates gain value. If you sell these bonds prior to maturity, you may record a profit.