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Reading 43: Fixed-Income Markets: Issuance, Trading, and Funding - Coggle…

- - - - SOFR:
        Secured overnight financing rate
        
        Possible replacement for USD Libor based on repo rates
- - - - Investment bank or bank syndicate buys entire issue, then resells to dealers and investors.
      - Bonds sometimes trade for forward delivery in the "when-issue" or "grey" market
    - - Register entire issue with regulators, issue bonds over time
      - Can offer additional bonds to market without preparing a new and separate offering circular
  - - - Typically (T+2) or (T+3) for corporate bonds
      - (T+1) for government, quasi-government bonds
      - Same day (cash settlement) for many money market securities and some government bonds
- - - - Maturities up to 270 days
      - Sold on a discount interest basis
      - Settle T + 0
    - - Maturities up to 364 days
      - Sold on discount or add-on interest basis
      - Settle T + 2
      - Trade on secondary market → negotiable
    - - Risk that new paper cannot be issued to pay for maturing paper
      - Consequences:
        
        Deterioration of credit
        
        Systemic failure
      - Firms have backup lines of credit to get acceptable credit ratings
        
        Backup lines of credit: funds available unless there is a material adverse change
  - - - Receive extra yield (yield enhanced)
      - Pay less than face value if credit event occurs for reference security (example: default)
      - Equivalent to purchasing bond and selling credit default swap (receive payments , pay if default occurs)
    - - Guaranteed minimum value at maturity
      - Potential upside gains based on return of other asset
      - Guarantee certificate if guaranteed maturity value equals original cost
      - Example: Zero-coupon bond with S&P call options, prepackaged as structured instrument
    - - Investments based on underlying instrument (e.g., interest rate, stock index return)
      - No guaranteed payment amount at maturity
      - Includes floating-rate notes, payments based on a reference rate
    - - Include an inverse floaters
      - Coupon rate = fixed rate - (L x reference rate)
        
        L > 1: Leverage inverse floater
        
        L <1: Deleverage inverse floater
- - - - a source of wholesale fund for bank
      - can be traded in secondary market prior to maturity
- - - - Both parties have counterparty risk (counterparty won't honor the obligation)
      - Security lender may experience financial stress
      - Security may decline in value (buyback price > security value)
    - - Both Repo rate and Repo margin
        
        Decrease with higher credit quality of collateral
        
        Increase with the term of the repo (maturity) as there are more risk in longer period of time
        
        Decrease when security is in greater demand; as better term is offer when in high demand
      - Repo rate is LOWER when delivery is required;
      - Repo margin is LOWER when
        
        counterparty credit is better
        
        maturity of repurchase agreement is short
        
        underlying collateral is in high demand (or short supply)