Library/CFA (Chartered Financial Analyst)/JuiceNotes 2024 Fixed Income/Fixed-Income Issuance and Trading

Fixed-Income Issuance and Trading

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Credit and Maturity Spectrum5 min

Fixed-income instruments are classified by their risk profile (Risk Free, Investment Grade, High Yield) and maturity duration (Short, Intermediate, Long). Short-term generally refers to periods less than one year, Intermediate to 1-10 years, and Long-term to over 10 years. Instruments like Treasury Bills represent short-term risk-free assets, while Treasury Bonds represent the long-term equivalent. Investment-grade corporate sectors utilize Commercial Paper and Repos for short-term needs and Secured Corporate Bonds for longer durations. High-yield sectors rely on Leveraged Loans and Unsecured Corporate Bonds.

Key Points

Risk categories: Risk Free, Investment Grade, High Yield.
Maturity buckets: Short (<1yr), Intermediate (1-10yrs), Long (>10yrs).
T-Bills are Short-Term Risk-Free; T-Bonds are Long-Term Risk-Free.
Investment Grade includes Commercial Paper and Secured Corporate Bonds.
High Yield includes Leveraged Loans and Unsecured Corporate Bonds.

Credit Ratings and Agencies5 min

Credit ratings are letter-grade assessments of default probability and expected loss. The dividing line between Investment Grade and High Yield (Speculative/Junk) is crucial for portfolio managers. Investment Grade is defined as BBB- (Standard & Poor's) or Baa3 (Moody's) and higher. Ratings of BB+ (Standard & Poor's) or Ba1 (Moody's) and lower are considered High Yield. 'Fallen Angels' are bonds that lose their investment-grade status. Syndicated loans involve multiple lenders funding a single borrower to spread risk.

Key Points

Ratings assess probability of default and expected loss.
Investment Grade cutoff: BBB- / Baa3 or higher.
High Yield cutoff: BB+ / Ba1 or lower.
Fallen Angels: Investment grade bonds downgraded to junk status.
Syndicated Loan: Group of lenders providing funds to one borrower.

Primary and Secondary Markets6 min

The Primary Market is where new capital is raised. Mechanisms include public offerings, private placements, and auctions (for sovereigns). Underwriters facilitate this, conducting roadshows for debut issuers. A 'Best-efforts' offering involves intermediaries acting as brokers without guaranteeing the sale. The Secondary Market is where existing bonds trade, operating as an OTC, quote-driven market. Liquidity is key, indicated by the bid-offer spread. On-the-run sovereign issues are highly liquid, whereas off-the-run or seasoned corporate issues may trade infrequently. Distressed debt markets emerge when issuers face bankruptcy, shifting ownership from conservative institutions to opportunistic funds.

Key Points

Primary Market: New issuance; Secondary Market: Trading existing debt.
Debut issuers use roadshows to educate investors.
Best-efforts offering: No guarantee of sale, often for lower credit quality.
Secondary markets are OTC and quote-driven.
Bid-offer spread is the primary measure of liquidity.
On-the-run securities are more liquid than off-the-run.
Distressed debt is often sold by pension funds and bought by hedge funds.

Questions

Question 1

Which of the following timeframes defines 'Short term' in the fixed-income maturity spectrum described in the text?

Fixed-Income Issuance and Trading

Questions

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