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