Types of Bonds

Collateralised Bonds-Securitisation, Structured Products and Covered Bonds

Collateralised debt has been one of the fastest developing investment vehicles in the last decade based on the idea that credit can be advanced on the basis of whatever collateral, security, or compensation in the case of default a borrower can use to repay the loan. The collateralised debt instrument is therefore a kind of promissory note backed by collateral, security or whatever other compensation in the event of a default that a borrower has. The collateral or security can come from one or more sources such as mortgages or loans or bonds/debt or asset-backed securities.

The speed at which this concept spread through Europe at the turn of the 21st century has created a significant European market in these complex bond products. This is largely an institutional bond market, because the products are very complex in structure and size and difficult for a non professional individual investor to understand.

The collateralised debt market has been the one most severely hit by turbulence since the summer of 2007, and so is undergoing changes. Because of this turbulence and because of the inherent complexity of collateralised bonds, it is extremely important that individual investors consult a financial advisor and/or take financial advice when considering an investment in these types of bonds.

You may want to read Standard & Poor’s guide to the Fundamentals of Structured Finance Ratings for more background. 

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