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CFA Level I · CFA Level I Exam · Fixed-Income Securitization

A bank issues a covered bond backed by a pool of residential mortgage loans held on its balance sheet. If the bank becomes insolvent, covered bondholders most likely have:

Covered bondholders have dual recourse. They claim the segregated cover pool first and, if it falls short, the issuer as an unsecured creditor. This differs from ABS, where investors rely on assets transferred to a special purpose entity and generally have no recourse to the originator.

  1. Aa claim on the cover pool only, with no claim on the bank's other assets
  2. Ba dual recourse claim on the cover pool and, if it is insufficient, on the issuerCorrect
  3. Ca claim on the issuer's other assets only, because the cover pool is sold to a special purpose entity

Explanation

Covered bonds give investors dual recourse: first to the segregated cover pool and, for any shortfall, to the issuer as an unsecured claim. The first option describes a typical ABS structure. The third misdescribes covered bonds, because the assets stay on the issuer's balance sheet and are not sold to an SPE.

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