capital markets Flashcards
Matching finance principle
Companies should match the maturity structure of their
assets (that are funded through debt) with maturity
structure of their liabilities
what is the main type of intermediated finance?
Term loans which are issued via banks
What are term loans usually used for and how long do they range?
Banks lend fixed-term loans usually ranging 3 to 15 years and are Typically used to finance long-term capital expenditure
what does SIBOR stand for?
Singapore inter-bank offered rate.
-The average of rates at which banks in the Singapore market will lend to each other
What does LIBOR stand for?
London inter-bank offered rate.
- The average of rates at which banks in the London market will lend to each other for a specified currency
What does EURIBOR stand for?
European inter-bank offered rate
What does USCP stand for?
United States commercial paper; discount securities
what does BBSW stand for?
Bank bill swap rate.
- The average mid-point of banks’ bid & offer rates in the bank bill secondary market
what is a debt covenant?
agreements between a company and a creditor usually stating limits or thresholds for certain financial ratios that the company may not breach
Difference between LIBOR and BBSW
LIBOR: London Interbank OFFERED rate, ie it is and offer
BBSW: mid point
what is a positive covenant?
comply with maintaining minimum level of
working capital & providing financial statements
What is a negative covenant?
restrict the business & financial activities of
the borrowing firm
What are some examples of Loan Covenants?
- Maximum debt-to-equity ratio
- Restriction on more debt being issued
- Minimum working-capital ratios
- Minimum interest cover
- Restrictions on mergers and acquisitions
- Constraints on disposal of non-current assets
What are the S&P rating for NZ govt bonds?
domestic currency debt is AA+ & foreign currency debt is AA
Name uses of govt bonds
• Raise money for capital expenditure e.g. roading
• Help implement monetary policy
• Provide investment vehicles for FIs & super funds
• Help balance liquidity & credit available in financial
system
what are the most common form of govt stock held by the public?
retail kiwibonds
name the features of a local authorities (City) bond
- Normally, secured by recurring rates on rateable property.
* Not risk-free so rate of return higher than ordinary govt. bonds
What does SOE stand for and what are they?
State owned enterprise
- Is a legal entity that is created by a government to partake in commercial activities.
Where are bonds issued?
issued in the bond primary market, usually at face value
What is subordinated debt?
It is a L/T debt issue
- ranks behind all other liabilities, so in the case of a default they are repaid last out of the creditors; but are before equity holders
What is a debenture?
a form of security attache to to a corporate bond.
- a fixed &/or floating rate over the assets of the bond issuer
What 2 ways are corporate bonds be classifies as?
either Debenture or secured note
What is a unsecured note?
a corporate bond issued without any underlying security attached
What is a convertible bond?
• Offer an option at maturity for bond holders to accept
redemption in another form- usually share equity
What is a zero coupon bond?
It is a discount bond that has its interest paid at maturity
what relationship do bonds and interest rates have?
• Inverse relationship
– If interest rates fall(rise), bond price rise (fall)
– Effect is greater, the longer the time to maturity
do international capital markets offer direct or intermidiated fundng or both?
both
name 2 services offer by international banks
• Buying & selling foreign exchange
• Extension of credit for trade & payments by bills of exchange.
Issuance of Bankers’ Acceptances for trade
– Bank agrees to pay seller of goods when draft expires on
behalf of importer
what is a euro market?
large international market of international banks
(eurobanks) that accept large deposits & provide large loans
what is a dragon bond?
a bond issued by an asian bank except japan (Samurai)
What is a eurodollar bond?
US dollar denominated bond issued by an overseas company.
what is a eurokiwi bond?
NZ dollar denominated bond issued by an overseas company.
features of a medium to long term eurocurrency bank loan
– Minimum size at least USD3 million.
– Often involves syndicate of banks
– Term normally 5-10 years.
– Interest rate: LIBOR plus a margin
what does the term red herring mean?
a red herring is the preliminary prospectus in the sale of a eurobond.
