Fixed-Income Issuance & Trading Flashcards
Fixed-income instruments and markets are often categorized by issuer type / sector, credit quality, time to maturity, and sometimes, additional features such as currency, geography, and ESG characteristics.
Fixed-income investors seek to gain exposures to certain risks and to match the cash flows of known future obligations. Near-term obligations and the desire for liquid cash alternatives are often met with money market securities, while investors may assume greater interest rate risk with long-term bonds to meet obligations further in the future or pursue higher expected returns.
What is the common measure of credit quality?
Credit ratings
What are credit ratings?
Letter-grade, qualitative measures of an issuer’s ability to meet its debt obligations based on both the probability of default and the expected loss under a default scenario. Credit ratings are given and maintained by credit rating agencies for both short-term and long-term debt and for issuers and specific bond issues.
What is the lowest investment grade?
BBB- (Baa3 on Moody’s scale) is the lowest investment grade by market participants. Below this grade are speculative grades or high yields.
What is the highest speculative, high yield grade?
BB+ (or Ba1 on Moody’s scale)
What are fallen angels?
Fallen angels are bonds that were initially issued with an investment-grade rating but have since been downgraded to junk status due to the issuer’s deteriorating financial health.
What is the role of market indexes?
Tracking the broad risk and return of different security markets, which enables the evaluation of market performance, benchmarking the performance of investments and investment managers, and forming the basis for indexed investment strategies.
What are three things in which fixed-income indexes defers from an equity index?
- Fixed-income indexes hold many more constituent securities.
- The finite maturity of bonds and the higher frequency of new issuance lead to far more changes in constituents in fixed-income indexes than in equity indexes.
- Analogous to equity indexes weighted by issuers’ market cap, bond index constituents are usually weighted by market value of debt outstanding. Since bonds are issued by many types of issuers, broad bond indexes will reflect changes to bond market composition over time.
What are primary bond markets?
Markets in which an issuer (debut issuer) sells a new bond or bonds to investors to raise capital.
What are secondary bond markets?
Markets in which existing bonds are traded among investors.
Secured bond issuance among corporate high-yield, some special purpose entities, and other issuers is usually a longer and more involved process than for unsecured investment-grade bonds. Investors must familiarize themselves with unique and more complex covenants, as well as the use of both operating cash flows and collateral as sources of bond repayment. For bonds of lower credit quality, the financial intermediary does not guarantee the sale and may serve only as a broker in a best-efforts offering.
In instances where the bond size is small, the issuer is less well known, or the terms are more customized, a bond might take the form of a private placement or non-underwritten, unregistered offering of bonds sold only to a small group of investors.
Primary market issuance of sovereign debt usually takes the form of a public auction led by the national treasury or finance ministry.
Secondary fixed-income markets are mostly quote-driven or OTC markets. Major participants are institutional investors, financial intermediaries and central banks.
What is distressed debt?
Bonds of issuers believed to be very close to or in bankruptcy. Prices of these bonds trade in the secondary market well below par because bondholders are unlikely to receive all promised future interest and principal payments.
Hedge funds or other opportunistic investors are often buyers of distressed bonds because they look for price appreciation.
