Similarities between Long-Term Investment-Grade and High-Yield Issuance Both issuers and investors considering (non-callable) long-term debt of different maturities weigh the relative risk associated with a maturity choice against its costs or yield-to-maturity. Under normal market conditions, longer maturities are associated with both higher interest rates (yields-to-maturity on government bonds) and higher credit spreads for a…
Details
An important source of secured short-term lending and borrowing is the repurchase agreement (repo) market. A repurchase agreement, or repo, involves the sale of a security with a simultaneous agreement by the seller to buy the same (or a similar) security back from the purchaser at an agreed-on repurchase price and future date called the repurchase date. In…
Details
Both non-financial corporations and financial institutions rely on borrowed capital to support their short-term activities. External Loan Financing Non-financial corporations often rely on financial intermediaries for short-term financing. Common instruments include Lines of Credit Uncommitted lines of credit are the least reliable form of bank borrowing for a company, as the name suggests. A bank…
Details
Primary Fixed-Income Markets Primary bond markets are markets in which an issuer sells a new bond or bonds to investors to raise capital. In contrast, secondary bond markets are markets in which existing bonds are traded among investors. As in the case of an IPO for equity investors, an issuer approaching the bond market for the…
Details
Fixed-income indexes perform a similar function in bond markets as equity indexes in stock markets but differ in three important ways from their equity counterparts. If a bond fund aims to match the returns of a specific index, it will typically hold a representative sample of constituent securities in order to match index returns because…
Details
Fixed-income instruments and markets are typically categorised along three dimensions: issuer type (often known as sector), credit quality, and time to maturity. Sometimes, instruments and markets are additionally classified by issuers’ geography, currency, and ESG characteristics. In contrast to equities, where issuers typically issue just one or two instruments, issuers often have many fixed-income instruments outstanding. A…
Details
Fixed-income securities are subject to different legal and regulatory requirements depending on where they are issued and traded, as well as who holds them. Based on the jurisdictions of the issuer and the issuance, a bond can be classified as a domestic, foreign, or Eurobond. This classification has legal, tax, and regulatory implications for issuers…
Details
A contingency provision is a clause in a legal agreement that allows for an action if an event or circumstance occurs. The most common contingency provisions for bonds involve the right—but not the obligation—for an issuer or the bondholders to take an action specified in an indenture. Callable Bonds An issuer of a callable bond has…
Details
The most common bond cash flow structure is that of a standard fixed-coupon bond, often referred to as a bullet bond. The bond issuer receives the principal at settlement, makes periodic, fixed coupon payments, and repays the principal at maturity. Most government and corporate issuers use bullet bonds as their primary means of debt financing,…
Details
Bond Indentures A legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders. This legal contract is referred to as the bond indenture. Sources of Repayment The sources of bond repayment vary among issuers and are a key factor in determining a bond’s relative risk. …
Details