Bonds Flashcards
Bond market
Bonds are like loans where the borrower is committed to pay the interest (coupons). However unlike a traditional bank loan, a bond is tradable on the secondary market.
Market for bonds
Market where participants are provided with the issuance and trading of debt securities
2 types of bond markets
Domestic bond markets
- includes government bonds (gilts) and corporate bonds
Govt bonds
- are usually regarded as being free from credit risk. This is because governments have the power of taxation
- bonds issued by the British government are known as gilts and considered low risk investments
And then International bond markets
Two types of gilts
Conventional - nominal bonds that promise to pay a fixed coupon rate.
Index linked - represents bonds with borrowing rates and principal payments linked to CHANGES IN INFLATION RATE
Corporate bonds
Issued by corporations that wish to raise funds or capital for various purposes
Key difference between corporate bonds and governments
The probability of default
The higher the yield spread, lower the credit rating
Corporate bonds have a higher yield and chance of default is high
Yield depends on credit rating of company - they yield spread high the lower the bonds crib rating
Government bonds don’t default
Corporate bonds yield more than government bonds
International bond markets
EUROBRAND MARKET
EURO BRAND
- bond is sold by a domestic or foreign entity in a different currency that is different from the currency where the bond is issued.
A dollar bond issued in London is a dollar dominated EUROBRAND
Government bonds Gilts
Regarded as being free from credit risk
Because governments have the powers of taxation
They can sell government bonds on the secondary market if you want your money back quicker.
Secondary markets allow stock prices to develop based on supply and demand after issuance
They are regarded as being free from credit risk
Corporate bonds
Issued by corporations that wish to raise funds for various purposes
Types of courage bonds
Debentures
Warrants
Hybrid bonds
Debentures
Debt instrument unsecured by collateral
They are long term
E.g an interest breaking bond
Warrants
Security that entitles holder to buy underlying stock
Hybrid bonds
Convertible bonds that have features of ordinary bonds but they are heavily influenced by price movements
Global bonds
Bonds issued in several countries at the same time
Junk bonds
High risk and high held bonds with credit rating below BBB
Syndicated bonds
When a large group of investors jointly give loan to single borrower
LIBOR LONDPN INTERBANK OFFERED RSTD
Benchmark rate that represents interest rate at which banks offer to lend to one another.
Reference rate for borrowing is lending around the world.
It uses trimmed mean and figures from the quantities to work out an average.
Calculated for 5 currencies
7 borrowing periods
Two types of money Market
Interbank and call market
Call market
Provides borrowing and leading for a very short between banks
This may be overnight lending or a few days
Interbank market is a type of money market
Provides short term lending ranging from several years to a year
The rate thus market uses is lending rates LIBOR
Money market
A wholesale maker for short term funds
A market where trade of short term loans between banks and other financial institutions takes place
Two market in money markets
Domestic
International
International
Market in which borrowers and lenders of funds from different countries are brought together to exchange funds
Domestic
Deals with domestic short terms deposits held in country of issue
Domestic
Types of short term instruments
Treasury bills
Certificates issued by deposits
Treasury bills
Issued by treasury of the country
Regarded as risk free instruments
Since government guarantees to pay their face value upon maturity
Certificates issued by deposits
Specified maturity date and rate of interest
