lecture 8 (1)

Question 1

Global bonds

Answer 1

issue is a very large bond issue that would be difficult to sell in any one country or region of the world

Glboal bond issues were first offered in 1989

Simultaneously sold and subsequently traded in major markets worldwide

Most have been denominated in US dollar

Portion of a US dollar global bond sold by a US borrower in the united states is classified as a domestic bond and the portion sold elsewhere is a eurodollar bond

Question 2

Types of instruments

Answer 2

straight fixed rate issues

Euro-medium-term notes

Floating rate notes

Equity related bonds

Dual currency bonds

Question 3

straight fixed rate bonds

Answer 3

have specified maturity date and fixed coupon payments

Domestic bonds –> semiannual coupond payments

Eurobonds –> annual coupon payments

Vast majority of new international bond offerings are straight fixed-rate issues

Question 4

Euro-medium-term notes

Answer 4

Are (typically) fixed rate notes issued by a corporation with maturities ranging from less than a year to about 10 years

First introduced in 1986

Euro M T Ns have a fixed maturity and pay coupon interest on period dates

Euro MTN issue is partially sold on a continouous basis (so the borrower to obtain funds only as needed on a flexible basis.)

Question 5

Floating-rate notes

Answer 5

Are typically medium-term bonds with coupon payments indexed to some reference rate

First introduced in 1970

Common reference rate for US dollar FRNs are either three month or six month S O F R

Coupon payments on FRNs are usually quarterly or semiannual and in accord with the reference rate

Question 6

To whome are FLoaring rate bonds attractive

Answer 6

For investors with a strong need to preserve the principal value of the investmnet

Such investors they may need to liquidate the investment prior to the maturity of the bonds

Question 7

Floating rate notes example

Answer 7

Consider 5Y FRN with semiannual coupon payments. The coupons are referenced to 6m SOFR

Fave value = 1000$

6-m SOFR = 6.6%

X (Default risk premium of issuer) = 0.6%

a) what is the next period coupon rate

Coupon = 0.5 * (ß.066 + 0.0060) * 1000$ = 36

b) what if 6-m SOFR drops to 5.7

Coupon = 0.5 * (o,057 + 0,006) * 1000$ = 31.5

Question 8

Equity related bonds 2 types

Answer 8

Convertible bond
Bondholder has an option to exchange bonds with stocks

The conversion ratio has to be specified (floor-value of a convertible bond is its straight fixed rate bond value

Bonds with equity warrants (callable bonds) can be viewed as straight fixed bonds with the addition of a call option (or warrant) feature

Issuer can repurchase the bond at a specified call price before the maturity

Question 9

Who benefits from convertible bond

Answer 9

the bondholder benefits from price appreciation of the companies equities

Question 10

Who benefits from callable bonds

Answer 10

Investors who seek for protection againts interest rate risk

When market falls, buyback the bond and refinance it

Question 11

Dual currency bonds

Answer 11

A dual currency bond is a straight fixed rate bond issued in one currency that pays coupon interest in that same currency

But at maturity, the principal is repaid in another currency

Japanese firm have been big issues of dual currency bonds

Attractive for japanese MNCs to establish or expand US subsidiary

Question 12

What do credit rating sreflect

Answer 12

Default risk

Exchange rate uncertainty

Question 13

Bonds markets and credit ratings

Rating categories

Answer 13

Highers rating is AAA or Aaa

investment grade bonds are rated BBB or Baa and above

Speculative grade/junk bonds have ratings below BBB or Baa

Question 14

Eurobonds on average have Higher/lower credit ratings in comparison to domestic and foreign bonds

Answer 14

higher

Question 15

At least 70% of eurobonds are rated AA or AAA why?

Answer 15

1) sample bias issues: the borrowers with lower ratings do not issue eurobonds or withdraw from the market

Recognition and reputation matters: eurobonds markets are more accessible to the certain highly reated borrowers

Question 16

Determining credit ratings are complicated
Five key areas to determine a sovereigns creditworthiness

Answer 16

institutional assessment

Economic assessment

External assessment

Fiscal assessment

Monetary assessment

–> sovereign indicative rating level

Question 17

How to issue a eurobond in practice

Answer 17

A borrower deciding to raise funds by issueing eurobonds

She will contact an investment banker and ask it to serve as the lead manager.

Underwriter uses their own capital to buy the issue from the borrower at a discount (2-2.5% discount spread)

Question 18

Secondary market for eurobonds

Answer 18

It is an over the counter (OTC) market

Principal trading in london but also zurich, lux, frankfurt and singapore

Comprises marketmakers and brokers

Question 19

Market makers

Answer 19

they buy or sell for their own account by quoting two way bid and ask prices

They can trade directly with one another, through a broker, or with retail customers

Question 20

Broker

Answer 20

Accept buy and sell orders from market makers

And then find a matching party for hte trade for commission

They may also trade for their own account

Question 21

Clearing procedure (how to transfer ownership and payment from one party to another two major clearing systems

Answer 21

Euroclear and clearstream international

Each clearing system has a group of depository banks that physically store bond certificates

Physical transfer of the bonds seldom takes place

Members hold cash and bond accounts; transfers are done electronically