capital markets

Question 1

Matching finance principle

Answer 1

Companies should match the maturity structure of their
assets (that are funded through debt) with maturity
structure of their liabilities

Question 2

what is the main type of intermediated finance?

Answer 2

Term loans which are issued via banks

Question 3

What are term loans usually used for and how long do they range?

Answer 3

Banks lend fixed-term loans usually ranging 3 to 15 years and are Typically used to finance long-term capital expenditure

Question 4

what does SIBOR stand for?

Answer 4

Singapore inter-bank offered rate.

-The average of rates at which banks in the Singapore market will lend to each other

Question 5

What does LIBOR stand for?

Answer 5

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

Question 6

What does EURIBOR stand for?

Answer 6

European inter-bank offered rate

Question 7

What does USCP stand for?

Answer 7

United States commercial paper; discount securities

Question 8

what does BBSW stand for?

Answer 8

Bank bill swap rate.

- The average mid-point of banks’ bid & offer rates in the bank bill secondary market

Question 9

what is a debt covenant?

Answer 9

agreements between a company and a creditor usually stating limits or thresholds for certain financial ratios that the company may not breach

Question 10

Difference between LIBOR and BBSW

Answer 10

LIBOR: London Interbank OFFERED rate, ie it is and offer
BBSW: mid point

Question 11

what is a positive covenant?

Answer 11

comply with maintaining minimum level of

working capital & providing financial statements

Question 12

What is a negative covenant?

Answer 12

restrict the business & financial activities of

the borrowing firm

Question 13

What are some examples of Loan Covenants?

Answer 13

• 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

Question 14

What are the S&P rating for NZ govt bonds?

Answer 14

domestic currency debt is AA+ & foreign currency debt is AA

Question 15

Name uses of govt bonds

Answer 15

• 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

Question 16

what are the most common form of govt stock held by the public?

Answer 16

retail kiwibonds

Question 17

name the features of a local authorities (City) bond

Answer 17

• Normally, secured by recurring rates on rateable property.

* Not risk-free so rate of return higher than ordinary govt. bonds

Question 18

What does SOE stand for and what are they?

Answer 18

State owned enterprise

- Is a legal entity that is created by a government to partake in commercial activities.

Question 19

Where are bonds issued?

Answer 19

issued in the bond primary market, usually at face value

Question 20

What is subordinated debt?

Answer 20

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

Question 21

What is a debenture?

Answer 21

a form of security attache to to a corporate bond.

- a fixed &/or floating rate over the assets of the bond issuer

Question 22

What 2 ways are corporate bonds be classifies as?

Answer 22

either Debenture or secured note

Question 23

What is a unsecured note?

Answer 23

a corporate bond issued without any underlying security attached

Question 24

What is a convertible bond?

Answer 24

• Offer an option at maturity for bond holders to accept

redemption in another form- usually share equity

Question 25

What is a zero coupon bond?

Answer 25

It is a discount bond that has its interest paid at maturity

Question 26

what relationship do bonds and interest rates have?

Answer 26

• Inverse relationship
– If interest rates fall(rise), bond price rise (fall)
– Effect is greater, the longer the time to maturity

Question 27

do international capital markets offer direct or intermidiated fundng or both?

Answer 27

both

Question 28

name 2 services offer by international banks

Answer 28

• 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

Question 29

what is a euro market?

Answer 29

large international market of international banks

(eurobanks) that accept large deposits & provide large loans

Question 30

what is a dragon bond?

Answer 30

a bond issued by an asian bank except japan (Samurai)

Question 31

What is a eurodollar bond?

Answer 31

US dollar denominated bond issued by an overseas company.

Question 32

what is a eurokiwi bond?

Answer 32

NZ dollar denominated bond issued by an overseas company.

Question 33

features of a medium to long term eurocurrency bank loan

Answer 33

– Minimum size at least USD3 million.
– Often involves syndicate of banks
– Term normally 5-10 years.
– Interest rate: LIBOR plus a margin

Question 34

what does the term red herring mean?

Answer 34

a red herring is the preliminary prospectus in the sale of a eurobond.