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Tutorial: Mortgage bonds

What are mortgage bonds?

Mortgage bonds are collecting bonds with a par value of CZK 1 or 10,000 and determined interest yield (coupon) which can be either fixed or variable (it normally depends on the six-month interbank PRIBOR rate). Mortgage bonds with a fixed coupon are intended for clients who want to get a predetermined fixed yield for a determined period. Mortgage bonds with a variable coupon are intended for investors who invest their money in the long-term and want to use the increase of interest rates. Bonds with a variable coupon should be bought in periods of low interest rates, because the investor has the opportunity to share the yield from their future growth. Mortgage bonds are covered by mortgage claims under granted mortgage loans, and they rank among safest forms of investment. Česká spořitelna offers a broad scale of the bonds with various coupon amounts and maturities.

How do mortgage bonds work?

The interest yield on mortgage bonds bearing a fixed interest is normally paid out once a year at predetermined dates, mortgage bonds with a variable coupon pay out the yield interest every six months. On the maturity date, the bond nominal value is paid out together with the last coupon. The price for which the bonds are bought is also important for the actual investment yield. When current yields on the bond market are lower than the mortgage bonds interest yield, mortgage bonds are sold for a higher price than their nominal value and vice versa. Therefore the current yield to maturity, calculated from the current selling price and yields paid out in the future, can be lower or higher than the mortgage bonds interest yield. When interest rates change, the value of bonds with variable coupons fluctuates much less (in comparison with bonds with fixed coupons).

Your benefits

Purchase of mortgage bonds with a fixed yield will enable you to deposit money for a determined period, with a predetermined yield if you keep the bonds till their maturity date. If you buy mortgage bonds with a variable yield, you can use the growth of interest rates. The payout of the interest yield and nominal value of mortgage bonds is guaranteed by their issuer.

Your advantages

  • With mortgage bonds with a fixed coupon, the investor will gain a predetermined fixed yield.
  • With mortgage bonds with a variable coupon, the investor has the opportunity to share the yield from the future growth of market interest rates.
  • Thanks to a fixed maturity date, other investments can be planned.
  • Mortgage-backed bonds are covered by mortgage claims under granted mortgage loans, and they rank among safest forms of investment.
  • Current mortgage bonds prices are published daily in the price list of bonds; for mortgage bonds with a fixed yield, the current yield to maturity is also given
  • Mortgage bonds may be bought at Česká spořitelna branches or through SERVIS 24.
  • Pursuant to the Income Tax Act, interest yields on mortgage bonds issued by 31/12/2007 are not subject to any tax, the exemption applies to both natural and legal persons (as for mortgage bonds issued after 31/12/2007, the mortgage bonds coupon for natural persons is subject to 15%-withholding tax)

You should know

  • Mortgage bonds selling and purchase prices change every day due to yield changes on the bond market. If an investor holds mortgage bonds with a fixed yield to maturity, any changes in yields on the bond market will not affect its final yield.
  • Bonds are offered in the form of a collecting bond - Česká spořitelna purchases and sells bonds by transfer of securities in the register of shareholders. The transfer is settled within 3 business days after ordering a trade. If an investor pays the price of a bought bond, a share in a collecting bond will be credited to the investor's asset account within 3 business days after ordering the trade.
  • Exit fee for early redemption in case of Mortgage bonds is 1% of the trade volume.
  • Yield to maturity is the bond’s yield when it is held until the maturity date. It is derived from the current selling price of the bond and the future interest income. The yield to maturity is used to compare the yields on bonds with various maturity periods and with various coupons.
  • In the period between the yield interest (coupon) payouts, the aliquot interest yield (AÚV) will be calculated as a part of the nominal yield as allocated to the bondholder for the period from the bond issue or last coupon payout till the day that the trade is settled. Aliquot interest yield is added automatically to the bond price and can be positive or negative.
  • Issue additions of bonds issued by Česká spořitelna are available at branches or at websites of Česká spořitelna.


Purchase conditions

  • Mortgage-backed bonds can be bought for prices as quoted in the current bond price list.
  • To buy a bond, you need to have an asset account of investment instruments with Česká spořitelna. Opening an asset account is free of charge, it can be done at any branch of Česká spořitelna, an investor - natural person will have to submit a valid identity card, a legal person will have to submit documents of corporate personality.
  • To buy a bond, it is not necessary to have a money account at Česká spořitelna. Money for the payment of purchase may be sent to the respective collecting account from any Czech crown account
  • The fee of one instruction for bond purchase or sale is CZK 100, without regard to the number of bought or sold bonds.
  • The minimum investment is normally 3 pieces, i.e. CZK 30,000.

Who can buy?

  • Citizens of the Czech Republic or foreign nationals over the age of 18 years (legal representative in the case of a minor).
  • Legal person, natural person–entrepreneur.
  • Other entities established under the laws of the Czech Republic (foundations, movements, political parties).

How do mortgage bonds react to…

… increasing interest rates?
Any increase of interest rates on the market will lead to a drop in prices of already issued bonds with fixed coupons. If current interest rates are higher than the ones at the time that the bond was issued, under otherwise identical conditions, the bond will be sold for a price that is lower than its nominal value. But since coupon amounts are modified regularly, price fluctuations of mortgage bonds with a variable coupon will be smaller and shorter than with mortgage bonds with fixed yields.

… stable interest rates?
Under otherwise identical conditions, stable interest rates will not affect the bond price.

… decreasing interest rates?
Any decrease of interest rates on the market will lead to an increase of prices of already issued bonds with fixed coupons. If current interest rates are lower than the ones at the time that the bond was issued, under otherwise identical conditions, the bond will be sold for a higher price than its nominal value. But since coupon amounts are modified regularly, price fluctuations of mortgage bonds with a variable coupon will be smaller and shorter than with mortgage bonds with fixed yields.





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