A competitive bid process is either a single-price auction or multiple-price auction. In both cases, the issuer ranks bids by prices, choosing bids from highest to lowest until the desired issuance amount is reached. Under a single-price auction, all winning bidders pay the same price and receive the same coupon rate for the bonds regardless of their bid.…
National or sovereign government issuers are distinguished by their legal authority to establish and maintain a country’s public goods and services and their ability to tax economic activity in their jurisdiction. Additional sources of repayment for their debt obligations include tariffs, usage fees, and cash flows from government-owned enterprises. The size and scope of public…
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…
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…
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…
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…
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…
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…
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…
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,…