Issuance Trading and Funding Flashcards
Credit risk
- risk of loss if the issuer fails to make timely payments of interest and principal as they come due
Bonds can be classified by
- classification by type of issuer
- classification by credit quality
- classification by maturity
- classification by currency denomination
- classification by type of coupon
- classification by geography
- other classifications: tax-exempt, inflation linked
Classification by maturity
- classified by the original maturity of the bond when issued
- money market security: issued with a maturity at issuance < 1 yr (t bills)
- capital market securities: original maturity is > 1 yr
Primary Bond Markets
- public offerings (underwritten offerings, best effort, shelf registration, auctions, and private placement
Secondary Bond Markets
- traded through dealer markets
- most bond trading happens in the OTC markets
settlement:
- t+1 for govt and quasi govt bonds
- t+3 for corporate bonds
On-the-run
- the most recently issued sovereign securities that trade frequently
- aka the benchmark
- more liquid
Off-the-run
- were issued some time ago
- less liquid
Sovereign Bonds
- issued by national governments for fiscal reasons
- on-the-run / off-the-run
- not backed by collateral: taxing authority
- local currency bonds usually have higher credit rating than foreign currency bonds
Non-sovereign bonds
- issued by the local governments
- states, provinces, cities
- higher credit risk than sovereign bonds
- backed by taxing authority or cash flow from project
Quasi-government bonds
- “agency” bonds
- non-government entities, but usually backed by the govt
- fannie mae, freddie mac
- low credit risk
Supernational bonds
- issued by international organizations
- World Bank, IMF, EIB, ADB
Commercial paper
- issued for a short period (overnight to 270 days)
- corporate equivalent of a T-bill
- credit risk and liquidity risk varies from entity to entity
- rolling over the paper and rollover risk
- interest on a discount basis (interest is subtracted from the par value at issuance)
- Settlement: t+0
- can be sold to another party
Corporate Debt: notes v bonds
Orginal maturity:
- less than or equal to 12 years: “notes”
- greater than 12 years: bonds
- can be issued in any interest rate type
Principal repayment structures:
- serial maturity
- term maturity
- sinking fund
A floating-rate bond is an example of a _____ ______ whose coupon rate adjusts periodically to a pre-defined formula
a participation instrument: allows investors to participate in the return of an underlying instrument
Inverse floater coupon rate formula:
= C - (L * R)
C: the maximum coupon rate reached if the reference rate is equal to zero
L: the coupon leverage
R: the reference rate on the reset rate
*inverse floaters with a coupon leverage rate greater than 1 are known as “leveraged inverse floaters”
Inverse floaters with a coupon leverage rate more than 0 but less than 1 are known as “deleveraged inverse floaters”
Non-negotiable CD
- the interest and deposit are paid at maturity
- there is a penalty if the depositor withdraws funds before maturity
Negotiable CD
- depositors are allowed to sell the deposits before maturity
REPO
- an agreement between two parties where the seller sells a security with a commitment to buy the same security back from the purchaser at an agreed-upon price at a future date.
- if the collateral is low/scarce supply, the repo rate is lower
- both the parties in a repo agreement face the risk of default from the counterparty , but lender has the greater risk
- repo and reverse repo are not considered wholesale funds
Non-sovereign bonds usually trade at a _____ yield and ______ price than sovereign bonds with similar characterics
- non-sovereign bonds have a higher credit risk than sovereign bonds and therefore trade at a higher yield and lower price than sovereign bonds.
Principal repayment structures:
serial maturity
- the principal is repaid in parts, not a lump sum at maturity
term maturity
- the entire principal is paid upon maturity
- caries more credit risk
sinking fund
- funds are set aside to retire specific amounts of principal each year
