Chapter 3 - Chapter 3 Overview of Bond Sectors and...

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1 Chapter 3 Overview of Bond Sectors and Instruments
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2 Overview of the sectors of the bond market Bond market sectors Internal (national) bond market External bond market Domestic bond market Foreign bond market Euro bond market Global bond market Sovereign bonds Agency bonds Municipal bonds Corporate debts Asset-backed securities
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3 External bond market Eurobonds Issued (or underwritten) by an international syndicate of bankers This is the most important characteristic of a Eurobond offering Offered simultaneously to investors in a number of countries Out of the legal system of any one country Identified by the currency in which the bonds are denominated (e.g., Eurodollar bonds , Euroyen bonds etc.)
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4 External bond market Global bonds Trade in the foreign bond market of one or more countries and the Eurobond market At issuance, they are sold simultaneously in multiple bond markets throughout the world at the same offering price The issuer must be of high credit quality and have a consistent need for large financing The issuance size is large, allowing for multiple tranches by maturity
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5 External bond market Global bonds ( continued ) The first global bond was issued by the World Bank in 1989 The first corporate global bond issued by a U.S. corporation was that issued by Walt Disney in 1996 A more recent example of global bonds: in June 2005, Republic of Italy issued US$3 billion of a three-year global bond The bond’s distribution breakdown on a regional basis was 56% in Asia, 17% in the U.K., 12% in North America, 8% in the rest of Europe, and 7% in the Middle East
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6 Internal bond market Foreign bonds Issued and traded in one country by someone living in another country. For example: Yankee bonds are issued by e.g., a British firm and traded in the U.S. Samurai bonds are issued by e.g., the German government and are trading in Japan Foreign bonds can be denominated in any currency Foreign bonds may be issued by: Private corporations National governments and their agencies The supranational (e.g., the World Bank)
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7 Internal bond market Domestic bond market Sovereign bonds (e.g., the US Treasury securities, no default risk, presumably ) Agency (semi-government) bonds ( no or little default risk, presumably ) Municipal (state or local governments) bonds (known as “ munis ”, small default risk) Corporate debts ( default risk ) Asset-backed securities (backed by e.g., auto loans, credit card receivables, student loans etc., some default risk, see Chapter 11 )
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8 US Treasury securities Fixed principal securities Treasury bills ( T bills ) Have maturities less than one year e.g., 4 week, 3 month, and 6 month Treasury bills Make no explicit interest payments (like zero coupon bonds) They are sold at a discount to par value The implicit interest on Treasury bills is the difference between par value and the purchase price They are called pure discount securities
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Chapter 3 - Chapter 3 Overview of Bond Sectors and...

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