(43) Fixed-Income Markets - Issuance, Trading, and Funding Flashcards
LOS 52. a: Describe classifications of global fixed-income markets. How can global bond markets be classified by?
Global bond markets can be classified by:
Type of issuer
Credit quality
Original maturity
Coupon
Currency and geography
Other classifications
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “type of issuer”.
Type of issuer: government (and government-related), corporate (financial and nonfinancial), securitized, and structured finance instrument (Mortgage backed securities and asset backed securities).
Sovereign government: national level
Non-sovereign: local level
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “credit quality”.
Credit quality: Investment grade (Baa3 or BBB - and up), noninvestment grade (high yield, speculative, junk)
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “original maturity”.
Original maturity: Money market (one year or less), capital market (more than one year).
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “coupon”. Explain Libor
Coupon: Fixed rate, floating rate
Floating rate = reference rate + spread
Reference rate is typically libor
Spread is typically constant and set at issuance
Libor: reflects the rate at which unsecured loans can be obtained between banks in the Interbank Money Market
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “currency and geography”.
Currency and geography: Domestic, foreign, global, Eurobond markets; developed, emerging markets.
LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “other classifications”.
Other classifications: Indexing, taxable status.
LOS 52. b: Describe the use of interbank offered rates as reference rates in floating-rate debt.
Interbank lending rates, such as London Interbank Offered Rate (Libor), are frequently used as a reference rates for floating-rate debt. An appropriate reference rate is one that matches a floating-rate note’s currency and frequency of rate resets, such as 6-month U.S. dollar Libor for a semiannual floating-rate note issued in U.S. dollars.
LOS 52. b: Describe the use of interbank offered rates as reference rates in floating-rate debt. Define the interbank market and interbank rates.
The interbank market refers to short-term borrowing and lending among banks of funds other than those on deposit at a central bank. Loans of reserves on deposits with a central bank are said to occur in the central bank funds market.
Interbank rates are rates that banks are willing to lend to each other
LOS 52. c: Describe mechanisms available for issuing bonds in primary markets.
Define primary market
- Primary market: issuers initially sell bonds to investors to raise capital.
- Bonds may be issued in the primary market through a public offering (Any member of the public may buy the bonds) or a private placement (only a selected investor or group of investors may buy the bond).
- Most common mechanisms of public offerings include
- Underwritten offering (firm committment offering) - Investment bank guarantees the sale of the bond issue at an offering price that is negotiated with the issuer
- investment bank is the underwriter
- Syndicated offering includes a group of underwriters
- Shelf registration - certain issuers can offer additional bonds to the public without having to prepare a new offering
- Best effort offering - investment bank/syndicate serve only as a broker (less risk for investment bank
- Auction - method that involves bidding; single price auction is where all winning bidders pay the same price and receive the same rate
- Underwritten offering (firm committment offering) - Investment bank guarantees the sale of the bond issue at an offering price that is negotiated with the issuer
- Private placemates are non-underwritten and unregistered. Low need for liquidity; ned higher yield
LOS 52. d: Describe secondary markets for bonds. (Two main ways for these markets to be structured)
- Markets in which existing bonds are subsequently traded among investors.
- Two main way to be structured:
- Organized exchange: provides a place where buyers and sellers can meet to
- Over the counter market (OTC): buy and sell orders initiated over a network (electronic trading platforms)
- Spreads between bid and ask prices are narrower for liquid issues and wider for less liquid issues. (Less than 5 bps is very liquid; 10-12 is reasonable; 50 is illiquid; no bid/offer - completely illiquid)
Example inclue central banks and large institutional investors.
LOS 52. e: Describe securities issued by sovereign governments.
Sovereign bonds are issued by national governments and backed by their taxing power. Sovereign bonds may be denominated in the local currency for a foreign currency. These bonds are usually called treasuries. They are typically unsecured obligations (not backed by collateral) and paid out of the budget surplus
The purpose of these bonds is typically for fiscal reasons such as to fund spending when tax revenues are insufficient to cover expenditures.
The most recent issued bond is called “on the run” or benchmark (Most active in the secondary market)
LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.
Non-sovereign government bonds are issued by governments below the national level, such as provinces, cities, and states. Typically issued to finance public projects: schools, roads, hospitals. Credit ratings are generally high. Higher yield/lower price.
LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.
Agency or quasi-government bonds are issued by government sponsored entities and may be explicitly or implicitly backed by the government. Rarely guaranteed by the sovereign. These are repaid from the cash flows of the entity. Typically have high credit rating.
LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.
Supranational bonds are issued by multilateral agencies that operate across national borders. (IMF, World Bank, ect.). Very highly rated
LOS 52. g: Describe types of debt issued by corporations. List them.
Debt issued by corporations include:
- Private debt
- Bi-lateral loans
- Syndicated loans
- Public debt:
- Commercial Paper
- Corporate notes and bonds
Reading 43 Fixed Income: What are the main differences between US commercial paper and Eurocommercial paper?
