Book 4_Fixed_READING 51_FIXED-INCOME ISSUANCE AND TRADING

Question 1

Global bond markets can be classified by

Answer 1

• Type of issuer. Sovereign, corporate, and special purpose entities issuing ABSs.
• Credit quality. Investment-grade (Baa3/BBB- and above), non-investment grade (Ba1/BB+ and below).
• Original maturity. Short term/money market (one year or less), intermediate term (one year to 10 years), long term (more than 10 years)

Question 2

Matching the maturity with the use of fund at the well-established investment-grade corporations

Answer 2

• commercial paper to fund short-term working capital requirements;
• intermediate-term debt to fund medium-term investments and permanent working capital;
• and long-term debt to fund capital investment in fixed assets.

Question 3

Where in the credit/maturity spectrum investors choose to invest

Answer 3

will depend on (1) their desired interest rate and (2) credit risk exposure and (3) the maturity of any obligations they need to meet
- Pension funds and insurance companies: long-term investment grade
- Corporations: short-term investment grade (excluding Treasury bills)
- Central banks: intermediate-term Treasury notes used to conduct monetary policy
- Bond funds and ETFs: intermediate investment-grade (excluding Treasury notes)
- Asset managers seeking higher returns: high-yield intermediate securities, distressed debt
- Financial intermediaries (banks): Treasuries across the maturity spectrum

Question 4

fixed-income indexes

Answer 4

have more constituents, higher turnover, and weights more affected by issuer sector and changes in borrowing trends over time.

Question 5

Broad bond indexes vs Narrower indexes

Answer 5

• Broad bond indexes that include all relevant bonds are referred to as aggregate indexes.
• Narrower indexes focus on sector, credit quality, geography, or ESG considerations.

Question 6

Bond issue in the primary market through a public offering or a private placement

Answer 6

• Bond issues that are underwritten have a price guaranteed by financial intermediaries; those on a best-efforts basis have no such guarantee
• Public offerings of government debt commonly take place through auctions.
• Debut issues are likely to be more time consuming and costly than subsequent repeat issues

Question 7

In a best-efforts offering

Answer 7

The investment bank or banks do not underwrite (i.e., purchase all of) a bond issue, but rather sell the bonds on a commission basis.

Question 8

Bonds sold by auction

Answer 8

Are offered directly to buyers by the issuer, typically a government.

Question 9

Bond issue by shelf registration

Answer 9

• A bond issue is registered with securities regulators in its aggregate value with a master prospectus.
• The bonds can then be issued over time when the issuer needs to raise funds.

Question 10

Bond issue in the secondary markets

Answer 10

• While some bonds trade on electronic platforms or exchanges, most are traded in OTC dealer markets.
• Spreads between bid and ask prices are narrower for liquid issues and wider for less liquid issues.

Question 11

Distressed debt

Answer 11

refers to bonds of issuers that are in, or expected to file for, bankruptcy

Question 12

fixed-income indexes vs equity indexes

Answer 12

A fixed-income index is expected to have higher turnover (due to maturing bonds and frequent re-issues) and a higher number of constituents (due to a single issuer typically having more bond issues in existence than equity issues).

Question 13

Sovereign bonds are described as “on the run”

Answer 13

when they represent the most recent issue in a specific maturity.