Buying High Yield Debt Flashcards
Why do insurance companies buy high yield debt?
high yield debt funds to generate current income to fund existing obligations.
Where do high yield bonds trade?
Most high yield bonds and leveraged loans trade over-the-counter. An OTC market is characterized as one that exists virtually through a network of trading relationships rather than having a more centrally organized or dedicated physical infrastructure like the NYSE trading floor.
Why are high yield bonds traded OTC?
There are several reasons why high yield trades OTC including:
(1) the relatively smaller size of debt issues,
(2) the fact that many issuers do not meet the listing requirements of the exchange, and
(3) high yield is more often bought by institutional buyers that do not require an exchange listing to trade.
What are the broker-dealers in an OTC market?
In an OTC market, broker-dealers such as investment banks serve as market-makers and quote prices where they would buy (bid) and sell (ask or offer) high yield bonds and leveraged loans.
Can stock traders rely on market makers like NASDAQ for liquidity?
Yes. Market-makers are required by the exchange to honor the bid–ask levels. The market-maker must provide liquidity to sellers at the ask price and sell to buyers at the bid price.
Can high yield sellers count on the market for liquidity?
high yield buyers cannot rely on market-makers for liquidity – an important downside consideration. In my experience, buyers must be prepared to hold investments through turbulent market periods because liquidity, as some like to say, is only there when you do not need it.
What does a wide bid/ask spread indicate?
When spreads are wide, this reflects uncer- tainty on buyer and seller interest – or a growing divide between the two camps.
What does a narrow bid/ask spread indicate?
When spreads are “tight,” or within a narrow range, this reflects more efficient trading and accurate pricing.
