L5 b - Fixed Income Flashcards
Public Fixed Income debt
“all securities with a pre-defined return issued by national government”
excluded debt public limited companies, regional gov., city council
FI = coupons, periodic payments (income) similar to IR payments on saving account
payment on coupon may not be continuous and can depend on some variable (inflation)
Securities
tradable financial asset that holds som type of monetary value
represents:
- OS position in publicly traded corporation via stock
- credit RS with governmental body or corp. representing that entity´s bond (not Private FX)
- rights to WS as represented by an option
Spanish Case
A) TREASURY = org. responsible for financing needs of state - issues securities:
- achieve stable, cont. financing in the economy
- reduce cost of financing
- maintain approp. level of market liquidity
- offer investors attractive financial instruments
BANK OF SPAIN:
- responsible for organising secondary markets when securities are traded
- but direct financing of Treasury is prohibited
- Euro MTS
- most important bonds issued in secondary markets are government bonds
FX income
Instruments
Bills, Strips, Consols, bonds, notes, convertible bonds financing government (public debt) and funds of corporate (to finance operation, projects) rather than issuing capital
FX Income
Basic Features
maturity (longer than one year)
coupon : periodic payment, % of nominal value of bond
IRR: discount ate that makes market price today the same as current vale of all cashflow the bond well pay in the future (future liability)
Yield to maturity
T-bills
Short Terms
short term FX income securities issued through auction at discount
all public instruments mostly issued at discount
ZCBonds (price < FV)
diff. between the price and nominal value at maturity is regarded the implicit interest of the security -return
NV = unadjusted value (without taking into account price level i.e. market rate changes)
Treasury Bonds
Mid-term
Spain: Treasury Bonds
- maturity 3 or 5 yrs
- annual coupons
- FV = 1000
US: Treasury Bonds
- maturity: 1, 3, 5, 7, 10 yrs
- issued coupons semi-annually
- fv 1000
Treasury Bonds
Long Term
Spain: obligaciones del estado
m = 10, 15, 30 yrs
annual and FV = 1000
US: treasury notes:
- m= 20 and 30 yrs
- coupons semi-annually and FV = 1000
TIPS & STRIPS
TIPS:
treasury inflation protected securities
- coupons defined in REAL terms = IR+Inflation rate
STRIPS:
option to separate each bond into ‘n’ ZCB securities and later sell to receive the cash as ownership is given
or you sell it bond on market
strips operation transforms an instrument with
a) explicit return (note o bond) into
b) implicit return (ZCB)
but maturity or redemption value have to coincide with original coupons or principal of instrumen
Primary Market
Government of Spain issues debt with diff. m via Treasury
uses competitive tender as the issue procedure
participants = banks. MF, retail investors
place competitive bids (volume &price) or non-comp. bids (only volume)
loan entities that bid at tender can later redistribute debt or sell to 3rd parties
Primary Market
Auction
single issue will be offered in successive competitive tenders (T-bill auction)
competitive tender = auction process through which large investor purchase newly issued gov. debt
Primary Market
types of operations
ordinary
- cash operations where buyer receives full right to securities
- 5 days (ordinary CO)
- > 5 days (ordinary forward Op)
Repo -2 ordinary operations at same time a) purchase vs b)sale one cash, other one forward this type involves agreement on conditions of both ordinary operations on day operation takes place repos = collaterised loans
Secondary Market
A) wholesale (primer escalon)
- market only allows institutional investor participating
- difference: MM(200) vs price takers(500 - inst.)
- MM ultimate purpose = facilitate 2nd market liquidity to PD
- MM are evaluated and their licence can be revoked (6month examine, to check if they actually provide liquidity in the market - very important for country´s liquidity/economy)
EuroMtS - largest 2nd market in EU
Secondary Market
B) rest
rest of transaction made through elect. markets
- between banks and clients
- banks and investment funds or pension funds
Secondary Market
Importance
important for determining “national” value of debt
Consequence = country risk premium
how much public debt is issued?
e.g. Coutry risk premium is huge between 10yrIR of Germany and France vs Spain and italy
