lecture 8 (1) Flashcards
Global bonds
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
Types of instruments
straight fixed rate issues
Euro-medium-term notes
Floating rate notes
Equity related bonds
Dual currency bonds
straight fixed rate bonds
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
Euro-medium-term notes
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.)
Floating-rate notes
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
To whome are FLoaring rate bonds attractive
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
Floating rate notes example
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
Equity related bonds 2 types
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
Who benefits from convertible bond
the bondholder benefits from price appreciation of the companies equities
Who benefits from callable bonds
Investors who seek for protection againts interest rate risk
When market falls, buyback the bond and refinance it
Dual currency bonds
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
What do credit rating sreflect
Default risk
Exchange rate uncertainty
Bonds markets and credit ratings
Rating categories
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
Eurobonds on average have Higher/lower credit ratings in comparison to domestic and foreign bonds
higher
At least 70% of eurobonds are rated AA or AAA why?
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
Determining credit ratings are complicated
Five key areas to determine a sovereigns creditworthiness
institutional assessment
Economic assessment
External assessment
Fiscal assessment
Monetary assessment
–> sovereign indicative rating level
How to issue a eurobond in practice
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)
Secondary market for eurobonds
It is an over the counter (OTC) market
Principal trading in london but also zurich, lux, frankfurt and singapore
Comprises marketmakers and brokers
Market makers
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
Broker
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
Clearing procedure (how to transfer ownership and payment from one party to another two major clearing systems
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
