Lecture 3_1 - Investment Banking and Brokerage Lecture 3:...

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Investment Banking and Brokerage Lecture 3: Fixed-Income Businesses
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Fixed-Income Securities Governments and large corporations issue bonds to finance ongoing projects For the lender, bond is a way to refinance the loan on a market Banks are involved in issuance process Advise issuer on financing strategies (capital structure) Pricing Distribution
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Fixed-Income Securities Bonds could always be underwritten by commercial banks and investment banks (no Glass Steagall limitation) Commercial banks have taken big market share in underwriting bonds Pushes investment banks to be more creative in terms of innovating new products
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Definitions and Terminology Bonds are simple loans traded on the bond market Agreement to pay back specified sum by certain date Short term: maturity up to 5 years Medium-term: maturity from 5-15 years Long-term: 15 years or longer (30-year US Treasury bonds) Coupon = periodic interest rate payment during the life of the instrument. Payment is determined by coupon rate Amount paid at maturity is called par value or face value
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Pricing Model P = C 1 1+ y + C 2 (1+ y ) 2 + ...+ C n + M (1+ y ) n Value can be thought of as the present value of a multi period income stream Yield relates income stream to the present value of the bond Inverse movement between price and yield
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Domestic Bond Market Market for bond issues governed by laws of country in which issuer is based U.S. bond market is world’s largest Euro denominated bond markets for countries belonging to Eurozone
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Foreign Bond Market Market for bond issued governed by laws of country other than that in which issuer is based Sold outside of borrower’s country and denominated in currency of country in which they are issued Yankee bonds (foreign bonds sold in US) Samurai bonds (foreign bonds sold in Japan) Bulldogs (foreign bonds sold in UK) Rembrandt (foreign bonds sold in
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Samurai Bonds Low interests rate in Japan (due to Bank of Japan trying to encourage spending) March 2001, 10-year Japanese bond yielded 1.24% compared with 5% for comparable U.S. government debt Despite low rates, many Japanese corporations focused on downsizing and restructuring rather than borrowing for investment Foreign corporations taking advantage of Japan’s low interest rates and investors to issue yen-denominated debt Number of Samurai bond issues increased from les than 20% in 1998 to over 120 in 200 In 2001, foreigners issuing yen-denominated debt raised $24 billion in the Japanese bond market up from $9 billion in 1998 Foreign countries like Croatia, Uruguay and Brazil were also raising money for their treasuries by issuing Samurai bonds Consider hedging foreign currency exposure which could increase cost of debt
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Eurobond Market Placed in countries other than the one in whose currency the bond is denominated Usually offered simultaneously in several national capital
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6111 taught by Professor Chappe,raphaele during the Spring '10 term at NYU Poly.

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Lecture 3_1 - Investment Banking and Brokerage Lecture 3:...

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