Covered bonds are a type of bond that provides investors with the protection of a security, but offers the flexibility of owning them through a stockbroker or other financial institution. In this article, we will discuss the different types of covered bonds in India and what factors investors should consider before investing.
What are Covered Bonds?
Covered bonds are a type of bond that is issued by a government or corporate entity and backed by the underlying assets of the issuer. In India, covered bonds are not as common as they are in other countries, but they do exist and offer investors a variety of benefits.
One benefit of covered bonds is that the issuer is required to maintain certain financial metrics, such as ratings, throughout the life of the bond. This means that investors can be confident that their money will be returned regardless of any changes in the issuer’s financial condition.
Another benefit of covered bonds is that they offer investors some protection against inflation. If inflation rises above a certain level, the bond’s nominal value will rise along with it, meaning that investors will still receive their original investment amount even if their actual purchasing power falls.
Who Issues Covered Bonds in India?
In India, covered bonds are a type of debt issued by banks and other financial institutions. They are typically used as a way to raise money from the public.
covered bonds are a type of debt security that is backed by assets such as corporate loans, receivables, or real estate. The issuer of the bond pays periodic interest and principal to investors.
Covered bonds are regulated by the Securities and Exchange Board of India (SEBI). They must meet certain requirements, including having a minimum investment amount, being registered with SEBI, and having a credit rating from an accredited rating agency.
The market for covered bonds in India is growing rapidly. In 2018, total issuance was Rs 1,583 crore. This represents an increase of 122% over 2017. The majority of this issuance was done by banks (Rs 934 crore), followed by insurance companies (Rs 189 crore).
Types of Covered Bonds in India
Covered bonds are a type of debt security that is typically issued by a government or corporate issuer and protected by the full faith and credit of a country or company. Covered bonds are similar to other types of bonds in that they offer investors the opportunity to earn periodic interest payments, but they differ in that the principal value of their investment is also protected by the issuer.
The first covered bond was issued in 1817 by The Bank of England to finance the construction of a canal in Egypt. Since then, covered bonds have become one of the most popular investment vehicles available to investors around the world.
There are a variety of different types of covered bonds available to investors, each with its own unique benefits and risks. Here are four common types of covered bonds:
1) Senior Unsecured Bond: This is the most common type of covered bond and is issued by governments and corporations with good credit ratings. The issuer promises to repay the principal amount plus interest at fixed intervals, regardless of whether or not it is able to pay its debtors. This type of bond is considered very safe because if the issuer fails to pay its debts, the bondholders will typically be paid in full even if there is a default by the issuer.
2) Junior Unsecured Bond: This type of covered bond is issued by companies that have less credit rating than the issuer of a senior unsecured bond. The issuer promises to repay the principal amount plus interest at fixed intervals, but may be unable to pay back all of its debtors in full.
3) Convertible Bond: This type of covered bond offers the investor the opportunity to convert their investment into either a senior unsecured bond or common stock in the issuer at any time prior to maturity. This allows investors to take advantage of fluctuations in the stock market while still benefiting from the safety and stability of a covered bond.
4) Credit-Protected Bond: This type of covered bond offers investors protection from default by the issuer, but does not provide any benefit if the issuer is able to pay its debts in full. Credit-Protected bonds are typically offered by companies with low credit ratings and are therefore considered less safe than other types of covered bonds.
Who are the Main Investors in Covered Bonds?
There are a few types of investors who invest in covered bonds in India. The main investors include insurance companies, pension funds, and asset management firms. These types of investors are looking to diversify their portfolios and invest in a lower-risk investment option. Covered bonds offer this type of security with the added benefit of being backed by government securities.