Chapter 2- Bond Markets Flashcards
Common criteria to classify fixed-income markets:
Type of issuer
Bond maturity, credit quality, geography, currency
denomination, and type of coupon
Bond issue and trading location
Fixed-Income Indices
• A fixed-income index is a multi-purpose tool used by
investors and investment managers to describe a given
bond market or sector, as well as to evaluate the
performance of investments and investment managers.
• Most fixed-income indices are constructed as portfolios
of securities that reflect a particular bond market or
sector.
• Index weighting may be based on price or value
(market capitalization).
A bond issue in primary markets can be sold via
a public offering (or public offer), in which any member of the public may buy the bonds,
a private placement, in which
only a selected group of investors may buy the bonds.
Underwritten offerings
Also called a firm commitment offering. The investment bank guarantees the sale of the bond issue at an offering price that is negotiated with the issuer.
Best effort offerings
The investment bank only serves as a broker. It only tries to sell the bond issue at the negotiated offering price if it is able to for a commission.
Auctions
These are bond issuing mechanisms that involve bidding. In many countries, most sovereign bonds are sold to the public via a public
auction.
Process of underwritten offerings
Determining
funding needs
Pricing the bond
issue
Issuing the
bonds
Selecting the
underwriter
Structuring the
transaction
Delivering
the bonds
shelf registration
is another method of public offering. It allows certain authorized issuers to offer additional bonds to the general public without having to prepare a new and separate offering circular for each bond issue.
What are bond auctions?
• Auction is a public offering method.
• Auction is a bond offering method involving bidding. Auction is
helpful for price discovery, which facilitates supply and demand
in determining prices and allocating securities.
• In my countries, most sovereign bonds are sold through public
auctions.
The auction includes three phases:
announcement, bidding, and
issuance.
Competitive bids and Non-competitive bids:
specify both the yield and amount
specify only the amount
Private placement
Also for primary bond markets. Compared to public offering, bonds can be offered through private placement, which is non-underwritten, unregistered offering sold to usually large institutional investors.
2 main ways of secondary/ aftermarket
Organised exchange
Over-the-counter OTC
An organized exchange:
provides a place where buyers and sellers can meet to arrange their trades.
Although buy or sell orders may come from anywhere, the transaction must take place at the exchange according to the rules imposed by the exchange.
OTC markets:
buy and sell orders initiated from various locations are matched through a communications network
vast majority of bonds are traded in OTC markets.
- OTC market is an electronic trading platform over which buyers and sellers submit buy or sell orders.
- The key to understand why there is a migration from exchanges to OCT is about liquidity.
