Book 4_Fixed_READING 53_FIXED-INCOME MARKETS FOR GOVERNMENT ISSUERS

Question 1

Sovereign issuers

Answer 1

are usually the highest credit quality and largest issuers of debt in any given bond market.

Question 2

Developed market sovereign issuers

Answer 2

have stable, diversified economies with consistent and transparent fiscal policy, with debt denominated in a major reserve currency

Question 3

Emerging market sovereign issuers

Answer 3

• Typically have faster growing, less stable, and more concentrated economies and, consequently, less stable tax revenues, sometimes tied to a dominant industry or commodity.
• Can be domestic (issued in domestic currency and held by domestic investors) or external (owed to foreign creditors)

Question 4

Ricardian equivalence theory

Answer 4

• suggests taxpayers expect that future taxes will have to repay any debt the government issues
• states that governments should be indifferent about raising taxes today or issuing debt of any maturity

Question 5

Benefits of having a broad range of maturities of government securities

Answer 5

• include the identification of benchmark government yield curves;
• the ability of investors to hedge interest rate risk;
• the ability to pledge the securities as collateral for repos;
• the ability of the central bank to use government bonds to execute monetary policy

Question 6

Agency or quasi-government bonds

Answer 6

are issued by entities created by national governments for specific purposes such as financing infrastructure investment or providing mortgage financing

Question 7

Local and regional government authorities

Answer 7

may issue debt for general public spending backed by local tax raising powers (general obligation bonds) or to fund a specific project (revenue bonds)

Question 8

Supranational bonds

Answer 8

are issued by international institutions that promote economic cooperation, trade, or economic growth.

Question 9

Sovereign issuers

Answer 9

use regular public auctions to issue government debt securities.

Question 10

Auctions bids

Answer 10

can be either competitive or noncompetitive.
- Competitive bids are used to set the price of the debt issue,
- While noncompetitive bids are guaranteed to have their allocation met at the auction price.

Question 11

In a single-price auction

Answer 11

all investors pay the price associated with the cut-off yield.

Question 12

In a multiple-price auction

Answer 12

successful competitive bidders actually pay the price that they bid

Question 13

Primary dealers

Answer 13

are financial institutions required to make competitive bids in auctions, submit bids in auctions on behalf of third parties, and act as counterparties to the central bank

Question 14

sovereign debt trading once issued

Answer 14

typically trades in quote-driven OTC dealer markets. Trading is most active and prices most informative for on-the-run bonds.