(R43) Fixed Income Securities: Issuance, Trading, and Funding Flashcards

1
Q

Sovereign vs. Non-sovereign gov’t bonds

A

Sovereign: national level

Non-sovereign: local level

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2
Q

Quasi gov’t bonds

A

Agency bonds

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3
Q

Floating rate bonds

A

Floating rate = reference rate + spread (fixed margin)
Reference rate is typically libor
Spread is typically constant and set at issuance
Libor: reflects the rate at which unsecured loans can be obtained between banks in the Interbank Money Market

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4
Q

Interbank market and interbank offered rates

A

The interbank market refers to short-term borrowing and lending among banks of funds other than those on deposit at a central bank. Loans of reserves on deposits with a central bank are said to occur in the central bank funds market.

Interbank offered rates are rates that banks are willing to lend to each other for up to one year and are unsecured

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5
Q

Primary vs. Secondary Bond Markets and main ways to be structured

A

Primary market: First time issuance of bond, issuers initially sell bonds to investors (i.e. Public offering or private placement)
Secondary Market: Markets in which existing bonds are subsequently traded among investors. (organized exchange or over the counter)

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6
Q

Define public offering and mechanisms used

A

Any member of the public may buy the goods; Underwritten offering, best effort offering, auction, and private placement (Primary bond market)

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7
Q

Define private placement

A

Only select investor or group of investors may buy the bond (primary bond market); non-underwritten and unregistered

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8
Q

Underwritten offering (firm committment)

A

A public offering mechanism; this is when an investment bank or syndicate guarantees the sale of the bond issue at an offering price that is negotiated with the issuer

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9
Q

Best effort offerings

A

A public offering mechanism where the investment bank/syndicate serves only as a broker for a commission

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10
Q

Auction

A

A public offering mechanism; A single price auction where all winning bidders pay the same price and receive the same coupon rate

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11
Q

Organized exchange (secondary bond market)

A

Provides a place where all buyers and sellers can meet to exchange bonds

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12
Q

Over the counter market (secondary bond market)

A

Buy and sell orders initiated over a network (electronic trading platforms

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13
Q

When do bonds settle for gov’t/quasi gov’t, corporations, and money markets?

A

Gov’t/quasi gov’t: T + 1
Corporations: T + 3
Money market: same day

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14
Q

Describe securities issued by sovereign governments

A

Issued by national governments; usually called treasuries; these bonds are typically unsecured obligations and paid out of budget surplus.
The purpose of these bonds is typically for fiscal reasons such as to fund spending when tax revenues are insufficient to cover expenditures.

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15
Q

Do floating-rate of fixed-rate bonds have lower interest rate risk (price risk)?

A

Floating-rate bonds

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16
Q

What are “on the run” bonds?

A

Most recently issued bond in the secondary market

17
Q

Describe securities issued by non-sovereign governments

A

Issued by governments below the national level; typically issued to finance public projects (i.e. schools, roads, hospitals). These bonds have high credit ratings

18
Q

Describe securities issued by quasi governments

A

Issued by government agencies or gov’t sponsored entities. Repaid from the cash flows of the entity and have high credit ratings

19
Q

Describe securities issued by supranational governments

A

Supranational bonds are issued by multilateral agencies that operate across national borders. (IMF, World Bank, ect.). Very highly rated

20
Q

Two types of debt issued by corporations

A

Public (commercial paper and corporate notes/bonds) and private (bi-lateral loans and syndicated loans); private debt is more expensive b/c it can be customized to the borrowers needs

21
Q

Bi-lateral loans vs. Syndicated loans

A

Bi-lateral loans: single lender to single borrower

Syndicated loans: group of lenders to a single borrower

22
Q

Define commercial paper and rollover risk

A

Commercial paper is a money market instrument (short term, unsecured) issued by financial institutions of high credit quality. Commercial paper is a source of working capital, seasonal needs, and bridge financing. Rollover risk (rolling over the paper) is risk that the issuer will be unable to issue new paper at maturity. Yield on CP is greater than yield on same maturity sovereign debt.

23
Q

Define corporate notes and bonds

A

Notes/bonds that range from 1 to 30 years. Short notes are less than 5 years; medium notes 5 to 12 years; bonds are greater than 12

24
Q

Describe the two types of principal repayment structures

A

1) Serial maturity - maturity dates are spread out over the bond’s life and a stated number of bonds mature each year; 2) Term maturity - principal all paid on one date (more credit risk)

25
Q

Differences between US commercial paper and euro commercial paper?

A

For each category, the US is first
Maturity: overnight to 270 days / overnight to 364 days
Interest: discount basis / interest bearing
Settlement: T + 0 (trade date) / T + 2

26
Q

Define capital protected instruments

A

Investor buys a zero coupon bond plus call options

27
Q

Define yield enhancement instruments

A

A bond that pays regular coupons but whose principal value depends on specific credit events such as ratings downgrade or default of an underlying asset

28
Q

Define participation instruments

A

Investor participate in the return of an underlying asset. Offers exposure to a particular index or asset price

29
Q

Define leveraged instruments

A

Instruments created to magnify returns and offer the possibility of high payoffs from small investments (i.e. inverse floater)

30
Q

Central bank funds market

A

Banks place minimum level of funds with the central bank. Helps ensure sufficient liquidity should depositors withdraw funds. Interest is called the central bank funds rate.

31
Q

Repurchase agreements

A

The sale of a security with an agreement to buy it back at an agreed on price at some future date (usually next day)

32
Q

Repo margin

A

Difference between the amount borrowed and the value of the security (aka haircut); it is negotiated between counterparties

33
Q

Term vs. overnight repo

A

Term - longer than one day

Overnight - one day

34
Q

Reverse Repo

A

Repurchase agreements are an important source of short-term financing for bond dealers. If a bond dealer is lending funds instead of borrowing, the agreement is known as a reverse repo.