Topic 4: The Debt Market Flashcards
Describe the corporate debt market?
A demand for external funds means it has to make one of the following options:
- to borrow on the money market or acquire funds in the capital market
- to issue debt or equity instruments
- to borrow funds from an intermediary or directly
What are the key features of a standard bond?
Face value: maturity value - principle to be paid on maturity
Coupon value: interest payments on a bond pa or semi annually
Maturity date: the date the principle is paid
Term to maturity: time between now and maturity date
Price: coupon payments + principle
Yield: rate of return or IR - determined by IR and riskiness
What are the variations to the standard bond?
Floating rate: based on LIBOR (London interbank offer rate) used as a marker.
Zero coupon bonds: no coupon interest is paid. Have a much longer maturity and sold at a steep discount.
Deferred coupon bonds: no interest payments in first few years. Allows time for issuer to establish a cash flow.
Convertible notes: convertible into shares, at or before a fixed date in the future. What you do depends on whether bonds increase or decrease price.
Bonds with embedded options:has an option to buy back (callable) or for bond holder to sell back the bonds (puttable)
See bond pricing formula here:
Finding the interest payment at time period (t) and FV is the face value, ie: FV is $1000 and has 3 years to mature and pays an annual coupon rate of 8% and the yield (IR) is 6%, what is the price of the bond?
See pg 98 in topic 5
What are the sources of corporate bonds?
Intermediated finance- banks not usually a major supplier of long term funds.
Short term loans: can be rolled over to gain access to medium term loans if bank allows it.
Bank bills: corporation borrows funds through bank bills with bank acting as acceptor. When the bill matures a new one is issued. An acceptance fee is involved.
Overdrafts: traditionally more expensive and can be a mismatch h between assets and liabilities, also means banks can’t reinvest those funds because they have to make them available to you, hence the increased cost. Also more risky for the bank.
Mortgage finance: much like residential home loans. insurance and super funds more likely to use these as they match with the long tear nature of their liabilities.
Term loans/advances: can be tailored, have regular equal instalments and interest. Can be fixed rates but intermediaries reluctant to use. Instead a marker is used.
Lease finance: the right to use an asset, like renting - for an agreed period for an agreed amount. Includes offices, houses, vehicles, computers.
Direct finances: need a high credit rating and to borrow large sums.
Name some features of international bonds?
Foreign bonds: issued in currencies other than the borrowers country.
Eurobonds: just means other than the US, does not mean it is limited to euro markets. Came about from Cold War between US and Russia.
Name features of the standard Eurobond?
- Medium to long term
- anonymous
- sold direct to public
- usually undertaken of r large amounts, need a high credit rating
- $50 mill is the min
- 3-12 years
- underwritten by banks
Types of international bonds?
(FRN) - floating rate bonds: medium to long term, based on a marker rate (BBSW - bank bill swap rate). They have floating coupons.
EXOTICS- these have special features, like they can be converted to shares etc.
Dual Currency Bonds: raise funds in one currency and make coupon payments in another.
What are the main features of the debt - capital market?
+12 months
Corporate trading - issue corporate bonds
Governments - public sector bonds
Both net borrowers (deficit)
