Classification on the basis of issuers
Classification on the basis of Variability of Coupon
Classification on the Basis of Variability of Maturity
Classification on the basis of Principal Repayment
Other type of BondsHigh Yield (Junk) Bonds
High yield bonds are securities rated below investment grade, that is, rated below Baa3 (Moody’s) or BBB- (Standard & Poor's). This form of debt carries a higher risk of default compared with other forms of debt, but compensates investors by paying a higher yield.
The high yield market was relatively small up until the 1970s. During that decade, companies that were once investment grade companies (‘fallen angels’) were looking to raise funds. To achieve this, they had to offer high coupon rates on their bond issues. Even then, some fund managers and other investors were reluctant to enter the high yield market. But the fallen angels were not the only ones finding it difficult to get funding – so too were the start-ups. These companies also had to offer high coupons in order to attract investors.
Today, high-yield bonds are more commonly used to provide working capital for growing companies. Most high yield bonds are issued with original maturities of 10 years or less. They are typically callable, but investors usually have call protection for the first four or five years.
Covered Bonds
Covered bonds are bonds collateralized by commercial and/or residential mortgages and/or public sector assets. They represent the senior debt instrument of the issuer, with the bondholder having full recourse to a pool of assets ring-fenced from the issuer's other assets. Covered bonds are similar in some ways to asset-backed securities; however, the pool of assets is not placed in a special purpose vehicle (SPV) but instead remains on the balance sheet of the issuer. Segregation of the pool assets has to be undisputed, otherwise a high rating for the pool may not be achieved. The credit strength of the issuer is the main driver.
Covered bonds typically range from one to ten years, with the euro being the preferred currency choice for issuers.
The largest and best-known market for covered bonds is the German Pfandbriefe market. The issuing of Pfandbriefe dates back to the 18th century. Today, Pfandbriefe are issued in two forms, Öffentliche Pfandbriefe (collateralized by public sector assets) and Hypothekenpfandbriefe (collateralized by commercial and/or residential mortgages). The market remained largely unknown outside Germany until the emergence in 1995 of Jumbo Pfandbriefe, which have a minimum issue size of EUR 1 billion and the market-making commitment of at least three investment banks. International institutional investors are attracted to this market not only because of the pure size of the issues, but also because of the extremely high liquidity.
Although the German market remains the biggest market for covered bonds today, other countries are beginning to establish markets for these securites. For example, covered bond markets have grown significantly in Spain (Cédulas Hipotecarias), France (Obligations Foncières), Ireland, and the UK.
From an investor’s point of view, there are a number of attractions in relation to covered bonds, including:
’double protection’ (a claim against the issuer and a preferential claim over the cover pool in case of issuer insolvency)
yield pick-up compared to government, supranational, and agency securities
high liquidity due to large issue sizes and market maker commitments, particularly for ’jumbo’ issues
a form of diversification from other bonds in an investor’s portfolio
The investor base for covered bonds includes: fund/asset managers, savings and cooperative banks, central banks, and insurance companies.
Classification on the basis of Variability of Coupon
Classification on the Basis of Variability of Maturity
Classification on the basis of Principal Repayment
Other type of BondsHigh Yield (Junk) Bonds
High yield bonds are securities rated below investment grade, that is, rated below Baa3 (Moody’s) or BBB- (Standard & Poor's). This form of debt carries a higher risk of default compared with other forms of debt, but compensates investors by paying a higher yield.
The high yield market was relatively small up until the 1970s. During that decade, companies that were once investment grade companies (‘fallen angels’) were looking to raise funds. To achieve this, they had to offer high coupon rates on their bond issues. Even then, some fund managers and other investors were reluctant to enter the high yield market. But the fallen angels were not the only ones finding it difficult to get funding – so too were the start-ups. These companies also had to offer high coupons in order to attract investors.
Today, high-yield bonds are more commonly used to provide working capital for growing companies. Most high yield bonds are issued with original maturities of 10 years or less. They are typically callable, but investors usually have call protection for the first four or five years.
Covered Bonds
Covered bonds are bonds collateralized by commercial and/or residential mortgages and/or public sector assets. They represent the senior debt instrument of the issuer, with the bondholder having full recourse to a pool of assets ring-fenced from the issuer's other assets. Covered bonds are similar in some ways to asset-backed securities; however, the pool of assets is not placed in a special purpose vehicle (SPV) but instead remains on the balance sheet of the issuer. Segregation of the pool assets has to be undisputed, otherwise a high rating for the pool may not be achieved. The credit strength of the issuer is the main driver.
Covered bonds typically range from one to ten years, with the euro being the preferred currency choice for issuers.
The largest and best-known market for covered bonds is the German Pfandbriefe market. The issuing of Pfandbriefe dates back to the 18th century. Today, Pfandbriefe are issued in two forms, Öffentliche Pfandbriefe (collateralized by public sector assets) and Hypothekenpfandbriefe (collateralized by commercial and/or residential mortgages). The market remained largely unknown outside Germany until the emergence in 1995 of Jumbo Pfandbriefe, which have a minimum issue size of EUR 1 billion and the market-making commitment of at least three investment banks. International institutional investors are attracted to this market not only because of the pure size of the issues, but also because of the extremely high liquidity.
Although the German market remains the biggest market for covered bonds today, other countries are beginning to establish markets for these securites. For example, covered bond markets have grown significantly in Spain (Cédulas Hipotecarias), France (Obligations Foncières), Ireland, and the UK.
From an investor’s point of view, there are a number of attractions in relation to covered bonds, including:
’double protection’ (a claim against the issuer and a preferential claim over the cover pool in case of issuer insolvency)
yield pick-up compared to government, supranational, and agency securities
high liquidity due to large issue sizes and market maker commitments, particularly for ’jumbo’ issues
a form of diversification from other bonds in an investor’s portfolio
The investor base for covered bonds includes: fund/asset managers, savings and cooperative banks, central banks, and insurance companies.
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