(52) Fixed-Income Markets - Issuance, Trading, and Funding

Question 1

LOS 52. a: Describe classifications of global fixed-income markets. How can global bond markets be classified by?

Answer 1

Global bond markets can be classified by:

Type of issuer

Credit quality

Original maturity

Coupon

Currency and geography

Other classifications

Question 2

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “type of issuer”.

Answer 2

Type of issuer: government (and government-related), corporate (financial and nonfinancial), securitized, and structured finance instrument.

Question 3

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “credit quality”.

Answer 3

Credit quality: Investment grade, noninvestment grade.

Question 4

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “original maturity”.

Answer 4

Original maturity: Money market (one year or less), capital market (more than one year).

Question 5

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “coupon”.

Answer 5

Coupon: Fixed rate, floating rate.

Question 6

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “currency and geography”.

Answer 6

Currency and geography: Domestic, foreign, global, Eurobond markets; developed, emerging markets.

Question 7

LOS 52. a: Describe classifications of global fixed-income markets. Define the global bond market classification “other classifications”.

Answer 7

Other classifications: Indexing, taxable status.

Question 8

LOS 52. b: Describe the use of interbank offered rates as reference rates in floating-rate debt.

Answer 8

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.

Question 9

LOS 52. b: Describe the use of interbank offered rates as reference rates in floating-rate debt. Define the interbank market.

Answer 9

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.

Question 10

LOS 52. c: Describe mechanisms available for issuing bonds in primary markets.

Answer 10

Bonds may be issued in the primary market through a public offering or a private placement.

A public offering using an investment bank may be underwritten, with the investment bank or syndicate purchasing the entire issue and selling the bonds to dealers; or on a best-efforts basis, in which the investment bank sells the bond on commission. Public offerings may also take place through auctions, which is the method commonly used to issue government debt.

A private placement is the sale of an entire issue to a qualified investor or group of investors, which are typically large institutions.

Question 11

LOS 52. d: Describe secondary markets for bonds.

Answer 11

Bonds that have been issued previously trade in secondary markets. While some bonds trade on exchanges, most are traded in dealer markets. Spreads between bid and ask prices are narrower for liquid issues and wider for less liquid issues.

Trade settlement is typically T + 2 or T + 3 for corporate bonds and either cash settlement or T + 1 for government bonds.

Question 12

LOS 52. e: Describe securities issued by sovereign governments.

Answer 12

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.

Question 13

LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.

Answer 13

Non-sovereign government bonds are issued by governments below the national level, such as provinces or cities, and may be backed by taxing authority or revenues form a specific project.

Question 14

LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.

Answer 14

Agency or quasi-government bonds are issued by government sponsored entities and may be explicitly or implicitly backed by the government.

Question 15

LOS 52. f: Describe securities issued by non-sovereign governments, quasi-government entities, and supranational agencies.

Answer 15

Supranational bonds are issued by multilateral agencies that operate across national borders. (IMF, World Bank, ect.)

Question 16

LOS 52. g: Describe types of debt issued by corporations. List them.

Answer 16

Debt issued by corporations include:

• bank debt
• commercial paper
• corporate bonds, and;
• medium-term notes.

Question 17

LOS 52. g: Describe types of debt issued by corporations. Define bank debt.

Answer 17

Bank debt include bilateral loans form a single bank and syndicated loans from multiple banks.

Question 18

LOS 52. g: Describe types of debt issued by corporations. Define commercial paper.

Answer 18

Commercial paper is a money market instrument issued by corporates of high credit quality.

Question 19

LOS 52. g: Describe types of debt issued by corporations. Define corporate bonds.

Answer 19

Corporate bonds may have a term maturity structure (all bonds in an issue mature at the same time) or a serial maturity structure (bonds in an issue mature on a predetermined schedule) and may have a sinking fund provision.

Question 20

LOS 52. g: Describe types of debt issued by corporations. Define sinking fund provision.

Answer 20

With a sinking fund, the issuer must redeem part of the issue prior to maturity, but the specific bonds to be redeemed are not known.

Question 21

LOS 52. g: Describe types of debt issued by corporations. Define serial bonds.

Answer 21

Serial bonds are issued with a schedule of maturities and each bond has a known maturity date.

Question 22

LOS 52. g: Describe types of debt issued by corporations. Define term maturity structure.

Answer 22

In an issue with a term maturity structure, all the bonds are scheduled to mature on the same day.

Question 23

LOS 52. g: Describe types of debt issued by corporations. Define medium-term notes.

Answer 23

Medium-term notes are corporate issues that can be structured to meet the requirements of investors.

Question 24

LOS 52. h: Describe short-term funding alternatives available to banks. List the short-term funding alternatives available to banks.

Answer 24

Short-term funding alternatives available to banks include:

Customer deposits

Negotiable CDs

Central bank funds market

Interbank funds

Question 25

LOS 52. h: Describe short-term funding alternatives available to banks. Define customer deposits.

Answer 25

Customer deposits, including checking accounts, savings accounts, and money market mutual funds.

Question 26

LOS 52. h: Describe short-term funding alternatives available to banks. Define negotiable CDs.

Answer 26

Negotiable CDs, which may be sold in the wholesale market.

Question 27

LOS 52. h: Describe short-term funding alternatives available to banks. Define central bank funds market.

Answer 27

Central bank funds market. Banks may buy or sell excess reserves deposited with their central bank.

Question 28

LOS 52. h: Describe short-term funding alternatives available to banks. Define interbank funds.

Answer 28

Interbank funds. Banks make unsecured loans to one another for periods up to a year.

Question 29

LOS 52. i: Describe repurchase agreements (repos) and the risks associated with them.

Answer 29

A repurchase agreement is a form of short-term collateralized borrowing in which one party sells a security to another party and agrees to buy it back at a predetermined future date and price. The repo rate is the implicit interest rate of a repurchase agreement. The repo margin, or haircut, is the difference between the amount borrowed and the value of the security.

Question 30

LOS 52. i: Describe repurchase agreements (repos) and the risks associated with them. Define reverse repo.

Answer 30

Repurchase agreements are an important source of short-term financing for bond dealers. If a bond dealer is lending funds instead of borrowing, the agreement is known as a reverse repo.

Question 31

LOS 52. Sovereign bonds are described as on-the-run when they are what?

Answer 31

Sovereign bonds are described as on-the-run­ or benchmark when they represent the most recent issue in a specific maturity.