reading 43

Question 1

what are the 3 major categories of investors in fixed income securities?

Answer 1

• retail
• institutional
• central bank

Question 2

central bank

Answer 2

directly invest in fixed income securities through open market, to implement monetary policy.

they purchase (sell) domestic bonds when they want to increase (decrease) the monetary-based in the economy

Question 3

institutional investors

Answer 3

pension funds, hedge funds, charitable foundations, endowments, insurance companies, banks, and sovereign wealth funds.

Question 4

retail investors

Answer 4

prefer to invest in fixed income securities because of the attractiveness of relatively stable price and steady income

Question 5

fixed-income indices

Answer 5

• fixed income index

- index construction (security selection & index weighting) varies among indices

Question 6

fixed-income index

Answer 6

a multi-purpose tool used by investors & investment managers to describe a given bond market or sector and to evaluate investment manager performance

Question 7

secondary bond market

Answer 7

markets in which existing bonds are subsequently traded among investors

• called aftermarket

Question 8

secondary market structure

Answer 8

• otc (over the counter)

- organized exchanged

Question 9

organized exchanged

Answer 9

a place where buyers and seller can meet to arrange their trade

Question 10

OTC (over the counter)

Answer 10

buy and sell orders initiated from various locations are matched through a communication network.

Question 11

liquidy in secondary market

Answer 11

refers to the ability to buy or sell bonds fast at price close to their fair market value

Question 12

Settlement process

Answer 12

the bonds are delivered to the buyer and payment is received by the seller

Question 13

secondary market for gov and quasi-gov settlement takes place on?

Answer 13

T+1 basis. the day after the transaction date

Question 14

secondary market for corporate bond settlement takes place on?

Answer 14

T+3 basis.

Question 15

what about cash settlement take place on?

Answer 15

the same day as trading.

Question 16

settlement

Answer 16

process that happens after the trade is made

Question 17

bid-offer spread (bid asked spread)

Answer 17

the price at which dealers will buy from a customer (bid) and sell to a customer (offer or ask) can be used to gauge the liquidity of the bond issues.

• reasonable spread is 10-12 basis point.
  illiquidity spread may be greater than 50 basis points.

Question 18

Retail deposits

Answer 18

Primary source of funding deposit-taking banks
- 2 main types include demand deposit & savings accounts

** the place you go to take and put money

Question 19

Central bank funds market

Answer 19

allow banks that have a surplus of funds to loan money to banks that need funds (maturity up to one year)

Question 20

Central bank funds rates

Answer 20

interest rates at which central bank funds are bought or sold.

Question 21

Repurchase agreement (repo)

Answer 21

transaction in which 1 party sell a security to the other party, with an obligation to buy it back at an agreed-price and future date

Question 22

is the repurchase price greater than the sale price?

Answer 22

yes

Question 23

repurchase date

Answer 23

is future date

Question 24

overnight repo

Answer 24

repurchase agreement is one day

Question 25

term repo

Answer 25

agreement is for more than one day

Question 26

repo to maturity

Answer 26

agreement lasting until the financial maturity date

Question 27

repo agreements is used by whom?

Answer 27

by dealers firms and central banks in conducting their daily open market operations. they are also used to borrow securities to implement short position

Question 28

repo rate is

Answer 28

the difference between the repurchase price and the original sale price. - paid on the repurchase date (at the termination of the agreement)

Question 29

who does the paid coupon too belong too?

Answer 29

any coupon paid by the security during the repurchase agreement belongs to the seller of the security

Question 30

reverse repurchase agreement or repo

Answer 30

transaction in which 1 party purchases a security from the other party, with an obligation to sell it back at an agreed-on price (which is lower than the purchase price) and future date

Question 31

repo margin

Answer 31

the difference between the market value of the security used as collateral and the value of the loan. - HAIR CUT - serves as margin safety for lenders of funds if the collateral market value declines.

Question 32

what factors does the repo margin depends on

Answer 32

- the length of the repurchase agreement - the quality of the collateral - the credit quality of the counterparty - the supply and demand conditions of the collateral

Question 33

what factors does repo rate depends on?

Answer 33

- the risk associated with the collateral - the term of the repurchase agreement - the delivery requirement for the collateral - the supply and demand condition of the collateral - the interest rates of alternatives financing in the money market

Question 34

Short-term wholesales funds

Answer 34

includes: - interbank funds - certificates of deposit - central bank funds

Question 35

Bilateral loans

Answer 35

loans from a single lender to a single borrower

Question 36

syndicate loans

Answer 36

loans from a group of lenders to a single borrower

Question 37

are bilateral and syndicate loans floating or not?

Answer 37

yes - floating, most of them

Question 38

what is interest rates based on for bilateral and syndicated loans?

Answer 38

interest rate is based on a reference rate plus a spread

Question 39

Commercial paper

Answer 39

short term - unsecured promissory note issued in the public market that represents a debt obligation of the issuer. not more than 270 days. usually 2 to 30 days.

Question 40

Commercial paper and its flexibility

Answer 40

-> leads it to have low-cost source of short term financing, and really available

Question 41

what is the connection between investors, commercial paper, and creditworthiness

Answer 41

investors are exposed to various level fo credit risk depending on the issuer creditworthiness

Question 42

what is rolling over the paper

Answer 42

new insurance of commercial paper to pay the existing one

Question 43

commercial paper - short dated maturity leads to

Answer 43

decrease in credit risk and increase number of issuers -> attractive commercial paper

Question 44

who issue the commercial paper

Answer 44

only the largest, most stable, highest-rated companies. issue low-cost commercial paper

Question 45

what is roll over risk

Answer 45

not be able to issue new commercial paper at maturity to meet redemption of maturing commercial paper

Question 46

what is the other name for backup lines of credit?

Answer 46

liquidity enhancement, or backup liqiduity lines

Question 47

serial maturity structure

Answer 47

maturity dates are spread out during the bonds life

Question 48

term maturity structure

Answer 48

notional pricipal is paid off in lump sum at maturity (more risk than serial maturity)

Question 49

is seniority ranking important for investors ?

Answer 49

yes

Question 50

short term maturity

Answer 50

<5 yr

Question 51

medium-term maturity

Answer 51

> 5 yr < 12 yr

Question 52

long term maturity

Answer 52

> 12 yr