Debt Capital Markets

9 Key excerpts on "Debt Capital Markets"

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  eBook - PDF

  Financial Institutions

  Markets and Money

  • David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  The chapter begins with a discus- sion of the function of the major participants in capital markets. We then turn our discussion to the bond markets: the markets for long‐term Treasury and agency securities, state and local government tax‐exempt bonds, and corporate bonds. We then discuss junk bonds, the securitization of debt, and the globalization of long‐term debt markets. Finally, we look at institutional arrangements that increase the market efficiency of capital markets such as regulatory bodies and the bond‐rating agencies. The market for mortgages is discussed in Chapter 9, and the market for equities is discussed in Chapter 10. ■ L E A R N I N G O B J E C T I V E S 1 Explain the role and function of capital markets. How does their role differ from that of the money markets? 2 Explain what STRIPs are and how they can be helpful in immunizing a bond portfolio against interest rate risk. 3 Discuss how the municipal bond market differs from the market for corporate bonds and the instruments traded in each market. 4 Explain what junk bonds are and why the market for them developed in the late 1980s. 5 Explain what is meant by the term securitization of debt. 6 Identify some of the reasons that bond markets are becoming global. 7 Discuss how the bond markets were affected by the global financial crisis of 2007–2008. 221 222 CHAPTER 8 Bond Markets finance capital goods with long‐term debt or equity to lock in their borrowing cost for the life of the project and to eliminate the problems associated with periodically refinanc- ing assets. For example, a firm buys a plant with an expected economic life of 15 years. Because short‐term rates are typically lower than long‐term rates, at first glance, short‐term financ- ing may look like a real deal. However, if interest rates rise dramatically, as they did in the early 1980s, the firm may find its borrowing cost skyrocketing as it has to refinance its short‐ term debt.

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  The Capital Markets and Financial Management in Banking

  • Robert Hudson, Alan Colley, Mark Largan(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  11  Eurobonds and International Capital Debt Markets

  A bond is a debt instrument issued in bearer or registered form. It constitutes a commitment by the issuer:

  • to pay a specified sum or sums of money to the holder at a predetermined date or dates;
  • to pay interest to the holder at stated intervals either at a fixed rate agreed at the outset or on a floating rate basis often at a margin over a given benchmark, i.e. Libor or an agreed index, e.g. the FTSE index or gold.

  The international debt markets are often thought of in terms of eurobonds only. Whilst the eurobond sector is the most visible, it is only one of the methods of capital finance and only one of the options for investors and there are many active domestic markets. Banks regularly access these markets to raise capital and are also active in them as lead managers, advisers, traders, market makers and investors.

  Domestic debt issues

  A domestic debt issue is one that an issuer raises within its own country and is denominated in its own country’s currency. For example, an American company raising U.S. dollars in New York is a totally domestic issue. Domestic issues invariably have a greater attraction to investors resident in the country of issue than investors from elsewhere since most domestic securities are subject to withholding tax. Foreign investors may not be willing or able to take advantage of double taxation agreements which may exist between their own and the issuer’s country, for example, because of the delay in reimbursement of the amount withheld. Domestic issues, therefore, are usually placed mainly with investors of the issuer’s country.

  The largest and most developed domestic market is in the United States. It is expected that the European bond markets will expand considerably following EMU and in time may equal the U.S. markets in terms of size, trading volume, liquidity and innovation. Investors will have a far bigger domestic market, whereas before they were likely to be restricted to their own national market. A shift is taking place in these markets from government to corporate issues, which mirrors the U.S. markets.

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  Global Financial Development Report 2015/2016

  Long-Term Finance

  • World Bank(Author)
  • 2015(Publication Date)
  • World Bank

    (Publisher)

  FINANCIAL MARKETS AND LONG-TERM FINANCE This section provides systematic evidence on how (financial and nonfinancial) firms used equity, bond, and syndicated loan markets during 1991–2013, distinguishing the differ-ent maturities of financing within debt mar-kets. 1 It shows how broad the use of capital markets is and discusses the association be-tween the use of capital markets and firm characteristics following de la Torre, Ize, and Schmukler (2012) and Didier, Levine, and Schmukler (2014). Most of the extensive lit-erature on the importance of well-developed financial markets and their links to economic growth focuses on the size of these markets (Levine 2005; Beck, Demirgüç-Kunt, and Levine 2010). 2 The evidence presented here expands on that literature by examining the activity in primary markets and by differenti-ating between short- and long-term financing. The total amount raised in equity, bond, and syndicated loan markets has grown rap-idly during the past two decades. The to-tal amount firms in high-income economies raised using these markets increased 5-fold between 1991 and 2013; firms in developing economies saw a 15-fold increase. Despite the substantial growth observed in developing economies, the gap between the two groups of economies persists. Although developing-debt is not necessarily optimal in all situa-tions. Ideally, creditors and debtors will even-tually decide how they share the risk involved in lending at different maturities. In many economies, however, creditors and debtors do not have ready access to long-term financing. This scarcity of long-term debt instruments can signal underlying problems such as market failures and policy distortions. Lack of long-term financing also has adverse implications for economic growth and devel-opment. In particular, firms in these econo-mies would be reluctant to finance long-term projects because of their exposure to the roll-over risk associated with short-term financing (Diamond 1991, 1993).

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  An Introduction to Financial Markets and Institutions

  • Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Part 4 Financial Markets

  1. The Money Markets
  2. The Corporate and Government Bond Markets
  3. The Stock Market
  4. The Mortgage Market

  Passage contains an image

  Chapter Eleven 11 The Money Markets

  DOI: 10.4324/9781315706405-15

  The need for a money market arises because receipts of economic units do not coincide with their expenditures. —Timothy Q. Cook and Robert K. LaRoche

  Learning Objectives

  After reading this chapter, you should know:

  • What the money market is and how it is used by various participants
  • Recent trends in money market instruments
  • How the money markets have become international in scope
  • What money market mutual funds are and why they have become important intermediaries

  Financial Markets

  In Part 4 of this text, we examine debt and equity markets more closely. The next three chapters look at the various capital markets, where financial assets with a maturity of greater than one year (or no maturity at all) are traded. Capital markets include the bond, stock, and mortgage markets and we spend a chapter discussing each one. In this chapter, we look at the money market—the short-term credit market where debt securities having original maturities of one year or less are traded. This definition distinguishes the money market from the capital market for longer-term debt and equity transactions. We begin by exploring how various participants use money market instruments to meet their borrowing and lending needs. In the second section, we review the individual money market instruments (originally covered in Chapter 3 ) and the development of money market mutual funds (MMMFs).

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Similarly, the primary market is the original and direct source of funding for governments issuing debt, in the form of bills, notes, or bonds. 4 Securities that have already been issued on primary markets can be bought and sold on secondary markets. These markets are not sources of funding for the original borrowers but serve two very valuable purposes. First, they provide 1 Money market securities also include financial assets that were issued originally with matur-ities longer than one year but have only a year or less remaining until they mature. The market for buying and selling foreign currencies is called the foreign exchange market (i.e., not the money market). 2 Commercial paper is a short-term debt instrument issued by companies that borrow directly from the money markets, rather than going through financial intermediaries, such as banks. It usually finances companies ’ working capital needs, which is the difference between current assets, such as cash, accounts receivable, and inventories, and current liabilities, such as ac-counts payable. Commercial paper is sold at a discount and redeemed at its full face value. 3 Eurodollar deposits are U.S. dollar deposits in banks located outside the United States. 4 Governments do not issue equity. 244 Chapter 10 Real Credit Markets existing securities holders with a way to convert their illiquid securities into cash, and second, they provide a means for interested investors to purchase debt or equity instruments in companies that are not making new issues. Inverse Relationship Between Debt Prices and Interest Yield Suppose a company promises to repay $100 in one year, and its securities are purchased for $95. In one year, investors (i.e., buyers of these debt securities) earn $5 on their $95 investments, which is a yield of 5.26% (see Figure 10.1). If these securities were sold for $90, investors would earn $10 on an initial pay-ment of $90, for a yield of 11.11%.

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  Bond and Money Markets: Strategy, Trading, Analysis

  • Moorad Choudhry(Author)
  • 2001(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  1

  The Debt Capital Markets

  Readers will be familiar with the cursory slot on evening television news, where the newscaster informs viewers where the main stock market index closed that day and where key foreign exchange rates closed at. In the United States most bulletins go one better and also tell us at what yield the Treasury long bond closed at. This is because bond prices are affected directly by economic and political events, and yield levels on certain government bonds are fundamental indicators of the economy. The yield level on the US Treasury long bond reflects the market’s view on US interest rates, inflation, public sector debt and economic growth. Reporting the bond yield level reflects the importance of the bond market to a country’s economy, as important as the level of the equity stock market.

  Bond and shares form part of the capital markets . Shares are equity capital while bonds are debt capital. So bonds are a form of debt, much like how a bank loan is a form of debt. Unlike bank loans however bonds can be traded in a market. A bond is a debt capital market instrument issued by a borrower, who is then required to repay to the lender/investor the amount borrowed plus interest, over a specified period of time. Bonds are also known as fixed income instruments, or fixed interest instruments in the sterling markets. Usually bonds are considered to be those debt securities with terms to maturity of over one year. Debt issued with a maturity of less than one year is considered to be money market debt. There are many different types of bonds that can be issued. The most common bond is the conventional (or plain vanilla or bullet ) bond. This is a bond paying regular (annual or semi-annual) interest at a fixed rate over a fixed period to maturity or redemption, with the return of principal

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  Bond and Money Markets

  Strategy, Trading, Analysis

  • Moorad Choudhry(Author)
  • 2003(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  The banks and securities houses that facilitate trading in bonds in both the primary and secondary markets are also often observed to be both borrowers and investors in bonds. The bond markets in developed countries are large and liquid , a term used to describe the ease with which it is possible to buy and sell bonds. In emerging markets a debt market usually develops ahead of an equity market, led by trading in government bills and bonds. This reflects the fact that, as in developed economies, government debt is usually the largest volume debt in the domestic market and the highest quality paper available. The different types of bonds in the market reflect the different types of issuers and their respective require-ments. Some bonds are safer investments than others. The advantage of bonds to an investor is that they represent a 1 The musician David Bowie has issued bonds backed with royalties payable from purchases of his back catalogue. Governments have issued bonds to cover expenditure from early times, such as the issue by King William in 1694 to pay for the war against France, in effect the first United Kingdom gilt issue. That was also the year the Bank of England was founded. 4 Part I: Introduction to the Bond Markets fixed source of current income, with an assurance of repayment of the loan on maturity. Bonds issued by developed country governments are deemed to be guaranteed investments in that the final repayment is virtually certain. In the event of default of the issuing entity, bondholders rank above shareholders for compensation payments. There is lower risk associated with bonds compared to shares as an investment, and therefore almost invariably a lower return over the longer term. We can now look in more detail at some important features of bonds. 1.1 Description We have said that a bond is a debt instrument, usually paying a fixed rate of interest over a fixed period of time.

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  International Financial Management

  • Geert Bekaert, Robert Hodrick(Authors)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  These institutions must manage at least $100 million in securities from issuers not affiliated with the institution. The International Character of Debt In Chapter 6, we encountered the external capital market. An external debt market involves debt sold to investors outside the borders of the country issuing the currency in which the debt is denominated. In contrast, an internal debt market involves debt that is denominated in the currency of the host country and sold within that country. International Debt Financing 454 In the long-term debt markets, it is customary to distinguish between domestic and international bonds. Domestic bonds are issued and traded within an internal debt market. International bonds are traded outside the country of the issuer. There are two types of international bonds. Foreign bonds are issued in a domestic market by a foreign borrower, denominated in the domestic currency, marketed to domestic residents, and regulated by the domestic authorities. Over the years, vari- ous foreign bonds have earned nicknames. For example, there are Yankee bonds in the United States, bulldog bonds in the United Kingdom, Samurai bonds in Japan, Matadors in Spain, and Rembrandts in the Netherlands. The other type of interna- tional bond is a Eurobond, which is denominated in one or more currencies but is traded in external markets outside the borders of the countries issuing the currencies. We can split up bond issues in a particular country with the following diagram: Issued by residents Issued by non-residents Domestic currency A. Domestic bond B. Foreign bond Foreign currency C. Eurobond D. Eurobond The sum of segments B and D comprise the external, or cross-border, bond market. The international bond market comprises segments B, C, and D. The next section provides much more detail on the international bond market.

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  Capital Market Instruments

  Analysis and valuation

  • M. Choudhry, D. Joannas, R. Pereira, R. Pienaar(Authors)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Roth, P. Mastering Foreign Exchange and Money Markets, FT Prentice Hall, 1996. Stigum, M. and Robinson, F. Money Market and Bond Calculations, Irwin, 1996. Walmsley, J. The Foreign Exchange and Money Markets Guide, 2nd edn, Wiley, 2000. INTRODUCTION In most countries government expenditure exceeds the level of government income received through taxation. This shortfall is met by government borrowing, and bonds are issued to finance the government’s debt. The core of any domestic capital market is usually the government bond market, which also forms the benchmark for all other borrowing. Government agencies also issue bonds, as do local governments or municipalities. Often (but not always) these bonds are virtu- ally as secure as government bonds. Corporate borrowers issue bonds both to raise finance for major projects and to cover ongoing and operational expenses. Corpo- rate finance is a mixture of debt and equity, and a specific capital project will often be financed by a mixture of both. The Debt Capital Markets exist because of the financing requirements of govern- ments and corporates. The sources of capital are varied, but the total supply of funds in a market is made up of personal or household savings, business savings and increases in the overall money supply. However, the requirements of savers and borrowers differ significantly, in that savers have a short-term investment hori- zon while borrowers prefer to take a longer-term view. The ‘constitutional weak- ness’ of what would otherwise be unintermediated financial markets led, from an early stage, to the development of financial intermediaries. The world bond market has increased in size more than 15 times in the last 30 years. As at the end of 2002 outstanding volume stood at over US$21 trillion. Table 4.1 shows that the United States constitutes almost 50 per cent of the world’s bond market.

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