reading 43 Flashcards
what are the 3 major categories of investors in fixed income securities?
- retail
- institutional
- central bank
central bank
directly invest in fixed income securities through open market, to implement monetary policy.
they purchase (sell) domestic bonds when they want to increase (decrease) the monetary-based in the economy
institutional investors
pension funds, hedge funds, charitable foundations, endowments, insurance companies, banks, and sovereign wealth funds.
retail investors
prefer to invest in fixed income securities because of the attractiveness of relatively stable price and steady income
fixed-income indices
- fixed income index
- index construction (security selection & index weighting) varies among indices
fixed-income index
a multi-purpose tool used by investors & investment managers to describe a given bond market or sector and to evaluate investment manager performance
secondary bond market
markets in which existing bonds are subsequently traded among investors
- called aftermarket
secondary market structure
- otc (over the counter)
- organized exchanged
organized exchanged
a place where buyers and seller can meet to arrange their trade
OTC (over the counter)
buy and sell orders initiated from various locations are matched through a communication network.
liquidy in secondary market
refers to the ability to buy or sell bonds fast at price close to their fair market value
Settlement process
the bonds are delivered to the buyer and payment is received by the seller
secondary market for gov and quasi-gov settlement takes place on?
T+1 basis. the day after the transaction date
secondary market for corporate bond settlement takes place on?
T+3 basis.
what about cash settlement take place on?
the same day as trading.
settlement
process that happens after the trade is made
bid-offer spread (bid asked spread)
the price at which dealers will buy from a customer (bid) and sell to a customer (offer or ask) can be used to gauge the liquidity of the bond issues.
- reasonable spread is 10-12 basis point.
illiquidity spread may be greater than 50 basis points.
Retail deposits
Primary source of funding deposit-taking banks
- 2 main types include demand deposit & savings accounts
** the place you go to take and put money
Central bank funds market
allow banks that have a surplus of funds to loan money to banks that need funds (maturity up to one year)
Central bank funds rates
interest rates at which central bank funds are bought or sold.
Repurchase agreement (repo)
transaction in which 1 party sell a security to the other party, with an obligation to buy it back at an agreed-price and future date
is the repurchase price greater than the sale price?
yes
repurchase date
is future date
overnight repo
repurchase agreement is one day
term repo
agreement is for more than one day
repo to maturity
agreement lasting until the financial maturity date
repo agreements is used by whom?
by dealers firms and central banks in conducting their daily open market operations. they are also used to borrow securities to implement short position
repo rate is
the difference between the repurchase price and the original sale price.
- paid on the repurchase date (at the termination of the agreement)
who does the paid coupon too belong too?
any coupon paid by the security during the repurchase agreement belongs to the seller of the security
reverse repurchase agreement or repo
transaction in which 1 party purchases a security from the other party, with an obligation to sell it back at an agreed-on price (which is lower than the purchase price) and future date
repo margin
the difference between the market value of the security used as collateral and the value of the loan.
- HAIR CUT
- serves as margin safety for lenders of funds if the collateral market value declines.
what factors does the repo margin depends on
- the length of the repurchase agreement
- the quality of the collateral
- the credit quality of the counterparty
- the supply and demand conditions of the collateral
what factors does repo rate depends on?
- the risk associated with the collateral
- the term of the repurchase agreement
- the delivery requirement for the collateral
- the supply and demand condition of the collateral
- the interest rates of alternatives financing in the money market
Short-term wholesales funds
includes:
- interbank funds
- certificates of deposit
- central bank funds
Bilateral loans
loans from a single lender to a single borrower
syndicate loans
loans from a group of lenders to a single borrower
are bilateral and syndicate loans floating or not?
yes - floating, most of them
what is interest rates based on for bilateral and syndicated loans?
interest rate is based on a reference rate plus a spread
Commercial paper
short term - unsecured promissory note issued in the public market that represents a debt obligation of the issuer. not more than 270 days. usually 2 to 30 days.
Commercial paper and its flexibility
-> leads it to have low-cost source of short term financing, and really available
what is the connection between investors, commercial paper, and creditworthiness
investors are exposed to various level fo credit risk depending on the issuer creditworthiness
what is rolling over the paper
new insurance of commercial paper to pay the existing one
commercial paper - short dated maturity leads to
decrease in credit risk and increase number of issuers -> attractive commercial paper
who issue the commercial paper
only the largest, most stable, highest-rated companies. issue low-cost commercial paper
what is roll over risk
not be able to issue new commercial paper at maturity to meet redemption of maturing commercial paper
what is the other name for backup lines of credit?
liquidity enhancement, or backup liqiduity lines
serial maturity structure
maturity dates are spread out during the bonds life
term maturity structure
notional pricipal is paid off in lump sum at maturity (more risk than serial maturity)
is seniority ranking important for investors ?
yes
short term maturity
<5 yr
medium-term maturity
> 5 yr < 12 yr
long term maturity
> 12 yr
