(R43) Fixed Income Securities: Issuance, Trading, and Funding

Question 1

Sovereign vs. Non-sovereign gov’t bonds

Answer 1

Sovereign: national level

Non-sovereign: local level

Question 2

Quasi gov’t bonds

Answer 2

Agency bonds

Question 3

Floating rate bonds

Answer 3

Floating rate = reference rate + spread (fixed margin)
Reference rate is typically libor
Spread is typically constant and set at issuance
Libor: reflects the rate at which unsecured loans can be obtained between banks in the Interbank Money Market

Question 4

Interbank market and interbank offered rates

Answer 4

The interbank market refers to short-term borrowing and lending among banks of funds other than those on deposit at a central bank. Loans of reserves on deposits with a central bank are said to occur in the central bank funds market.

Interbank offered rates are rates that banks are willing to lend to each other for up to one year and are unsecured

Question 5

Primary vs. Secondary Bond Markets and main ways to be structured

Answer 5

Primary market: First time issuance of bond, issuers initially sell bonds to investors (i.e. Public offering or private placement)
Secondary Market: Markets in which existing bonds are subsequently traded among investors. (organized exchange or over the counter)

Question 6

Define public offering and mechanisms used

Answer 6

Any member of the public may buy the goods; Underwritten offering, best effort offering, auction, and private placement (Primary bond market)

Question 7

Define private placement

Answer 7

Only select investor or group of investors may buy the bond (primary bond market); non-underwritten and unregistered

Question 8

Underwritten offering (firm committment)

Answer 8

A public offering mechanism; this is when an investment bank or syndicate guarantees the sale of the bond issue at an offering price that is negotiated with the issuer

Question 9

Best effort offerings

Answer 9

A public offering mechanism where the investment bank/syndicate serves only as a broker for a commission

Question 10

Auction

Answer 10

A public offering mechanism; A single price auction where all winning bidders pay the same price and receive the same coupon rate

Question 11

Organized exchange (secondary bond market)

Answer 11

Provides a place where all buyers and sellers can meet to exchange bonds

Question 12

Over the counter market (secondary bond market)

Answer 12

Buy and sell orders initiated over a network (electronic trading platforms

Question 13

When do bonds settle for gov’t/quasi gov’t, corporations, and money markets?

Answer 13

Gov’t/quasi gov’t: T + 1
Corporations: T + 3
Money market: same day

Question 14

Describe securities issued by sovereign governments

Answer 14

Issued by national governments; usually called treasuries; these bonds are typically unsecured obligations and paid out of budget surplus.
The purpose of these bonds is typically for fiscal reasons such as to fund spending when tax revenues are insufficient to cover expenditures.

Question 15

Do floating-rate of fixed-rate bonds have lower interest rate risk (price risk)?

Answer 15

Floating-rate bonds

Question 16

What are “on the run” bonds?

Answer 16

Most recently issued bond in the secondary market

Question 17

Describe securities issued by non-sovereign governments

Answer 17

Issued by governments below the national level; typically issued to finance public projects (i.e. schools, roads, hospitals). These bonds have high credit ratings

Question 18

Describe securities issued by quasi governments

Answer 18

Issued by government agencies or gov’t sponsored entities. Repaid from the cash flows of the entity and have high credit ratings

Question 19

Describe securities issued by supranational governments

Answer 19

Supranational bonds are issued by multilateral agencies that operate across national borders. (IMF, World Bank, ect.). Very highly rated

Question 20

Two types of debt issued by corporations

Answer 20

Public (commercial paper and corporate notes/bonds) and private (bi-lateral loans and syndicated loans); private debt is more expensive b/c it can be customized to the borrowers needs

Question 21

Bi-lateral loans vs. Syndicated loans

Answer 21

Bi-lateral loans: single lender to single borrower

Syndicated loans: group of lenders to a single borrower

Question 22

Define commercial paper and rollover risk

Answer 22

Commercial paper is a money market instrument (short term, unsecured) issued by financial institutions of high credit quality. Commercial paper is a source of working capital, seasonal needs, and bridge financing. Rollover risk (rolling over the paper) is risk that the issuer will be unable to issue new paper at maturity. Yield on CP is greater than yield on same maturity sovereign debt.

Question 23

Define corporate notes and bonds

Answer 23

Notes/bonds that range from 1 to 30 years. Short notes are less than 5 years; medium notes 5 to 12 years; bonds are greater than 12

Question 24

Describe the two types of principal repayment structures

Answer 24

1) Serial maturity - maturity dates are spread out over the bond’s life and a stated number of bonds mature each year; 2) Term maturity - principal all paid on one date (more credit risk)

Question 25

Differences between US commercial paper and euro commercial paper?

Answer 25

For each category, the US is first
Maturity: overnight to 270 days / overnight to 364 days
Interest: discount basis / interest bearing
Settlement: T + 0 (trade date) / T + 2

Question 26

Define capital protected instruments

Answer 26

Investor buys a zero coupon bond plus call options

Question 27

Define yield enhancement instruments

Answer 27

A bond that pays regular coupons but whose principal value depends on specific credit events such as ratings downgrade or default of an underlying asset

Question 28

Define participation instruments

Answer 28

Investor participate in the return of an underlying asset. Offers exposure to a particular index or asset price

Question 29

Define leveraged instruments

Answer 29

Instruments created to magnify returns and offer the possibility of high payoffs from small investments (i.e. inverse floater)

Question 30

Central bank funds market

Answer 30

Banks place minimum level of funds with the central bank. Helps ensure sufficient liquidity should depositors withdraw funds. Interest is called the central bank funds rate.

Question 31

Repurchase agreements

Answer 31

The sale of a security with an agreement to buy it back at an agreed on price at some future date (usually next day)

Question 32

Repo margin

Answer 32

Difference between the amount borrowed and the value of the security (aka haircut); it is negotiated between counterparties

Question 33

Term vs. overnight repo

Answer 33

Term - longer than one day

Overnight - one day

Question 34

Reverse Repo

Answer 34

Repurchase agreements are an important source of short-term financing for bond dealers. If a bond dealer is lending funds instead of borrowing, the agreement is known as a reverse repo.