Reading 43: Fixed-Income Markets: Issuance, Trading, and Funding Flashcards
Describe a repurchase agreement, and identify the factors on which the repo rate depends.
Repurchase agreement: Arrangement between two parties where one party sells a security to the other with a commitment to buy it back for a predetermined higher price. The difference between the lower selling price and the higher repurchase price is the interest cost of the loan.
Factors to determine repo rate:
Risk associated with the collateral
Term of the repurchase agreement
Delivery requirement for the collateral
Supply and demand conditions of the collateral
Interest rates on alternative sources of financing in the money market
Explain supranational bonds.
These bonds are issued by supranational (or multilateral) agencies such as the World Bank (WB) and the International Monetary Fund (IMF). Generally speaking, supranational bonds are issued as plain-vanilla bonds (though floating-rate bonds and callable bonds are also issued). They are typically highly rated and issued in large sizes (so they tend to be very liquid).
Describe the 2 ways in which secondary markets may be structured.
- Organized exchanges: These are places where buyers and sellers can meet to arrange their trades. Buyers and sellers may come from anywhere, but transactions must be executed at the exchange in accordance with the rules and regulations of the exchange.
- Over-the-counter (OTC) markets: In these markets, buyers and sellers submit their orders from various locations through electronic trading platforms. Orders are then matched and executed through a communications network.
How is an inverse floater’s periodic coupon rate determined?
Inverse floater coupon rate = C − (L × R)
where:
C = Maximum coupon rate
L = Coupon leverage
R = Reference rate on the reset date
Identify the phases of the underwriting process.
Determining the funding needs of the issuer.
Selecting the underwriter to market and sell bonds.
Structuring the transaction.
Preparing and submitting required regulatory filings, appointing a trustee; launching the offering.
Assessing market conditions by holding discussions with anchor buyers; analyzing the grey market.
Pricing the issue accordingly to ensure it is neither undersubscribed nor significantly oversubscribed.
Setting the final issue price on the pricing day, the last day for investors to commit to purchasing bonds.
Describe shelf registration.
Shelf registration allows certain (authorized) issuers to offer additional bonds to the general public without having to prepare a new and separate prospectus for each bond issue. Instead, there is a single prospectus, which can be used for multiple, undefined future offerings over several years.
List the 2 components of a floating-rate note (FRN) and explain each.
- The reference rate resets periodically, so the coupon rate is brought in line with market interest rates each time the reference rate is reset. The reference rate is the primary driver of the bond’s coupon rate.
- The spread is usually constant and is set at the time of bond issuance. It is based on the issuer’s creditworthiness.
Name the types of short-term wholesale funds.
Central bank funds
Interbank funds
Certificates of deposit (CDs)
Identify the characteristics on which corporate bonds can differ.
Coupon payment structures
Principal payment structures
Terms to maturity
Asset or collateral backing
Contingency provisions
Define sovereign and non-sovereign bonds.
Sovereign bonds: are bonds that are issued by a country’s central government (or its treasury). They are issued primarily to cover expenditures when tax revenues are insufficient.
Non-sovereign bonds: are those issued by levels of government that lie below the national level (e.g., provinces, regions, states, and cities). They are typically issued to finance public projects, such as schools and bridges.
