The international bond market Flashcards
What are eurodollars?
a US dollar held in Europe or elsewhere outside the US.
“the Eurodollar market”
What is the primary and secondary market?
Once a bond has been issued it moves into the secondary market. A primary market is one in which bonds are sold for the first time.
What are floating rate notes?
Floating rate bonds (more commonly known as floating rate notes or FRNs) are where interest payments rise and fall with the level of rates in the market. Attractive to banks since most of the money they lend is at floating rates as well so allows them to be sure of a constant relationship between lending and borrowing.
Typically FRNs are linked to 6 month LIBOR and are reset every 6 months.
What are zero coupon bonds?
This pays no interest at all and instead is issued as a discount to its face value. E.g. a bond for £100 may be issued at £50.
What are convertible bonds?
These are bond issues which can be converted into shares of the issuing company.
What is a warrant? (bonds)
Similar in principle to an option, warrants are sold separately from the original issue and give investors the right to purchase a new bond, bearing a fixed rate of interest.
What are capped and collared floaters?
These are Floating rate notes (FRNs) where the interest cannot rise above a level - the cap - or below a level - the collar.
Who are the three main rating agencies?
Standard and Poor’s, Moody’s and Fitch IBCA. (big three)
What is the process for an agency rating a bond issue?
The borrowing institution will pay one of the ratings agencies to rate the issue. Standard and Poor’s ratings range from AAA to D. Only bonds rated BBB or above are regarded as being of investment grade.
What are junk bonds?
Traditionally these would be bonds which would be below investment grade - ie with a rating below BBB.
Now junk bonds extend to cover all high-yielding but risky bonds. e.g. If bonds have been used to finance a takeover they may trade at or near face value but would offer much higher yields than other bonds in the market to reflect the higher risk.
What is a loan facility?
Companies may not wish to borrow via bond issues. In the 1980s many companies chose to borrow via loan facilities, which allowed them to draw down money when they wanted in return for a commitment fee to a panel of banks.
