Mitigating Covered Bond Extension Risk
Richard Kemmish
30 years: Capital markets & covered bonds
One of the problems from the popularity of soft-bullet maturities is that in the process of adapting it in different countries, there has been diversity about the finer details. In the final part of his Covered Bond series, Richard looks at how long the extension period should be, what interest rate is applied during the extension and which remedial actions must be taken.
One of the problems from the popularity of soft-bullet maturities is that in the process of adapting it in different countries, there has been diversity about the finer details. In the final part of his Covered Bond series, Richard looks at how long the extension period should be, what interest rate is applied during the extension and which remedial actions must be taken.
Mitigating Covered Bond Extension Risk
9 mins 8 secs
A prevalent issue with covered bonds is the refinancing risks that arise from mismatches in time between when assets pay down and the fixed maturity date of the bonds – to mitigate this, structures such as soft bullets and conditional pass throughs are used.
Key learning objectives:
Define natural hedging, pre-maturity tests and refinancing gaps
Explain how conditional pass throughs and soft bullet structures mitigate extension risk and their drawbacks
Identify the features of extensions
Richard Kemmish
08:32
07:41
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