Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
21 Cards in this Set
- Front
- Back
|
Classification of global fixed-income markets Type of issuer |
common classifications are government and government related bonds, corporate bonds and structured finance (securitized bonds). |
|
|
Classification of global fixed-income marketsCredit quality |
S&P, Moody's and Fitch all provide credit ratings on bonds. S&P and Fitch investment grade ratings: AAA, AA, A, BBB Moody's: Aaa through Baa3. Lower bonds are termed high-yield, speculative or junk bonds. |
|
|
Classification of global fixed-income marketsOriginal maturities |
one year or less are termed as money market securities (e.g. treasury bills, commercial paper and CDs). One year or more are termed capital market securities. |
|
|
Classification of global fixed-income marketsCoupon structure |
floating rate of fixed-rate bonds. |
|
|
Classification of global fixed-income marketsCurrency denomination |
price and returns are determined by the interest rates in the bond's currency. |
|
|
Classification of global fixed-income marketsGeography |
classified by the markets in which they are issued. Also possible to distinguish between developed and emerging markets. |
|
|
Classification of global fixed-income markets Indexing |
cash flows on some bonds are based on an index. |
|
|
Classification of global fixed-income markets Tax status |
some issuers may issue bonds that are exempt from income taxes, e.g. municipal bonds or munis. |
|
|
Reference rates |
most widely used is the Libor which is published daily for several currencies and for maturities of one day to one year. Rates are based on expected rates for unsecured loans from one bank to another in the interbank money market. Reference rate must match the frequency with which the coupon rate on the bond is reset. |
|
|
Mechanisms to issue bonds in primary markets |
newly issued bonds can be registered with securities regulators for sale to the public (public offering) or sold only to qualified investors (private placement). Bonds can be sold through an underwriting or a best efforts offering. For larger issues, the lead underwriter heads a syndicate of investment banks who collectively establish the pricing of the issue and are responsible for selling the bonds to dealers, who in turn sell them to investors. New bond issue is publicized and dealers indicate their interest. Some bonds are traded on a when issued basis in a grey market. Shelf registration: bond issue is registered with securities regulators with a master prospectus and are issued over time when the issuer needs to raise funds. |
|
|
Secondary markets for bonds |
while some bonds are traded on exchanges, the great majority of bond trading is made in the dealer or OTC market. |
|
|
Securities issued by sovereign governments |
are considered essentially free of default risk. Trading is most active and prices most informative for the most recently issued government securities. These issues are referred to as on-the-run bonds and also as benchmark bonds. |
|
|
Securities issued by non-sovereign governments, quasi-government entities and supranational agencies |
Non-sovereign government bonds are created to fund and provide services such as the construction of hospitals, airports, etc. Quasi-government bonds are sometimes backed by the national government and are issued by entities created by national governments for specific purposes. |
|
|
Bank debt |
typically Libor based, variable-rate loans. When the loan involves only one bank, it is referred to as bilateral loan, when a loan is funded by several banks, it is referred to as a syndicated loan. |
|
|
Commercial paper |
large, creditworthy corporations can reduce funding costs by issuing short-term debt securities referred to as commercial paper. Debt that is temporary until permanent financing can be secured is referred to as bridge financing. Often reissued or rolled over when it matures. Risk that a company will not be able to sell new commercial paper to replace maturing paper is called rollover risk. Typically issued as a pure discount security. In contrast, Eurocommercial paper (ECP) rates may be quoted as either a discount yield or an add-on yield. |
|
|
Corporate Bonds Serial bond issue |
bonds are issued with several maturity dates so that a portion of the issue is redeemed periodically. Important difference to an issue with a sinking fund is that with a serial bond issue, investors know at issuance when specific bonds will be redeemed. |
|
|
Corporate Bonds Medium-term notes (MTNs) |
issued in various maturities, ranging from nine months to 100 years. Most MTNs are issued by financial corporations and are structured to meet an institution's specifications. While they have less liquidity, they provide slightly higher yields. |
|
|
Short-term funding alternatives for banks |
*customer deposits *CDs (nonnegotiable CDs cannot be sold and withdrawal of funds often incurs a penalty) *borrow excess reserves from other banks in the central bank funds market *interbank funds |
|
|
Repurchase agreements (Repos) |
arrangement by which one party sells a security to a counterparty with a commitment to buy it back at a later date at a higher price. Interest rate implied by the two prices is called the repo rate. Repurchase agreement for one day is called overnight repo and an agreement covering a longer period is called a term repo. Percentage difference between market value and amount loaned is called repo margin or haircut. |
|
|
Repos Repo rate |
is *higher the longer the repo term *lower the higher the credit quality of the collateral *higher when the interest rates for alternative sources of funds are higher |
|
|
Repos Repo margin |
is *higher the longer the repo term *lower the higher the credit quality of the collateral security *lower the higher the credit quality of the borrower *lower when the collateral security is in high demand or low supply |
