chapter 4- debt (2)- bonds

Question 1

what is a bond?

Answer 1

• is an IOU issued by a government or company
• traceable instruments that generally pay a fixed rate of interest
• floating rate notes= bonds that pay a floating rate of interest
• are categorised by maturity from 90 day commercial paper and medium-term notes to long bonds and perpetuals

Question 2

what are sovereign issues?

Answer 2

bonds issued by governments

Question 3

what are US bonds called?

Answer 3

Treasuries

Question 4

what is bond issuance called?

Answer 4

primary market activity

Question 5

what is the total value of bonds in issue in the world?

Answer 5

$100 trillion

Question 6

what is the US municipal bond market?

Answer 6

where public bodies from schools and hospitals up to local governments, cities and states raise funding
their bonds are called munis

Question 7

what is book building?

Answer 7

this is the act of gauging interest amongst prospective investors

Question 8

what is a bought deal?

Answer 8

where the bank decides to issue the whole bond by itself
this means the issuer gets the money straight away
this also means the cost to the issuer will be higher due to the higher risk

Question 9

what is bond issuance also known as?

Answer 9

primary market activity

Question 10

what is the difference between primrary and secondary market?

Answer 10

primary= bond issuance 
secondary= where the bonds are bought and sold

Question 11

what do issuers need to issue a bond?

Answer 11

a credit rating

this is because the trading of bonds is frenetic and buyers of bonds don’t have time to do a credit assessment

Question 12

what is the top rating of credit?

Answer 12

AAA

Question 13

what is a bonds maturity?

Answer 13

its due date on which the bond expires

also known as redemption date

Question 14

what is the range of bond maturity?

Answer 14

90 dates to 20 years

Question 15

what are medium term notes?

Answer 15

bonds with maturities of around 5 years

MTN’s

Question 16

what are long term notes?

Answer 16

10 years + maturity
occasionally they will have no redemption date (these are known as perpetuals)
they are often issued by banks as part of the capital base that regulators require them to maintain

Question 17

what are payments in kind?

Answer 17

where some very long binds have mechanisms which allow the payments of interest to be postponed in times of financial stress

Question 18

what does the type of bond to issue depend on?

Answer 18

• funding horizons
• credit standing
• what the market has demand for

Question 19

for bonds that don’t have coupons, how are they issued instead?

Answer 19

they’re called zero coupon bonds

they’re issued at a discount to face value

Question 20

what is a different name for a junk bond?

Answer 20

fallen angel

it is where a bond issuer has fallen on hard times and what market value has therefore declined

Question 21

what are high yield bonds?

Answer 21

bonds that are issued with a deliberately high interest rate

Question 22

what is a term sheet?

Answer 22

the memo the lender and borrower sign which highlights the terms to be put in the full agreement