金融市場學(xué)課件bond markets

1Chapter4The

Capital

market:

Bond2Chapter

OutlineReview:

Types

of

Financial

MarketsBackground

on

bondsTreasury

and

federal

agency

bondsMunicipal

bondsCorporate

bondsInstitutional

use

of

bond

marketsGlobalization

of

bond

marketsDevelopment

and

Prospects

on

ChinaBonds

MarketReview:

Types

of

Financial

Markets3Financial

markets

can

be

distinguished

by

the

maturitystructure

and

trading

structure

of

its

securitiesMoney

versus

capital

marketsThe

flowof

short-term

funds

is

facilitated

by

money

marketsThe

flowof

long-term

funds

is

facilitated

by

capital

marketsPrimary

versus

secondary

marketsPrimary

markets

facilitate

the

issuance

of

new

securitiese.g.,

the

sale

of

new

corporate

stock

or

new

Treasury

securitiesSecondary

markets

facilitate

the

trading

of

existing

securitiese.g.,

the

sale

of

existing

stockSecurities

traded

in

secondary

markets

should

be

liquidSecurities

Traded

in

FinancialMarkets4Money

market

securitiesMoney

market

securities

are

debt

securitieswith

a

maturity

of

one

year

or

lessCharacteristics:LiquidLow

expected

returnLow

degree

of

riskSecurities

Traded

in

FinancialMarkets

(cont’d)5Capital

market

securitiesCapital

market

securities

are

those

with

amaturity

of

more

than

one

yearBonds

and

mortgagesStocksCapital

market

securities

have

a

higherexpected

return

and

more

risk

than

moneymarket

securitiesSecurities

Traded

in

FinancialMarkets

(cont’d)6Bonds

and

mortgagesBonds

are

long-term

debt

obligations

issuedby

corporations

and

government

agenciesMortgages

are

long-term

debt

obligationscreated

to

finance

the

purchase

of

real

estateBonds

and

mortgages

specify

the

amount

andtiming

of

interest

and

principal

paymentsSecurities

Traded

in

FinancialMarkets

(cont’d)7StocksStocks

(equity)

are

certificates

representingpartial

ownership

in

corporationsInvestors

may

earn

a

return

by

receivingdividends

and

capital

gainsStocks

have

a

higher

expected

return

andhigher

risk

than

long-term

debt

securitiesSecurities

Traded

in

FinancialMarkets

(cont’d)8Derivative

securitiesDerivative

securities

are

financial

contracts

whosevalues

are

derived

from

the

values

of

underlyingassetsSpeculating

with

derivatives

allow

investors

tobenefit

from

increases

or

decreases

in

the

underlyingassetRisk

management

with

derivatives

generates

gains

ifthe

value

of

the

underlying

security

declinesBackground

on

Bonds9Bonds

represents

long-term

debt

securities

that

areissued

by

government

agencies

or

corporationsInterest

payments

occur

annually

or

semiannuallyPar

value

is

repaid

at

maturityMost

bonds

have

maturities

between

10

and

30

yearsBearer

bonds

require

the

owner

to

clip

couponsattached

to

the

bondsRegistered

bonds

require

the

issuer

to

maintain

recordsof

who

owns

the

bond

and

automatically

send

couponpayments

to

the

owners10Background

on

Bonds

(cont’d)Bond

yieldsThe

issuer’s

cost

of

financing

is

measured

bythe

yield

to

maturityThe

annualized

yield

that

is

paid

by

the

issuer

over

thelife

of

the

bondEquates

the

future

coupon

and

principal

payments

tothe

initial

proceeds

receivedDoes

not

include

transaction

costs

associated

withissuing

the

bondEarned

by

an

investor

who

invests

in

a

bond

when

it

isissued

and

holds

it

until

maturityThe

holding

period

return

is

used

by

investorswho

do

not

hold

a

bond

to

maturity11Treasury

and

Federal

AgencyBondsThe

U.S.

Treasury

issues

Treasury

notesor

bonds

to

finance

federal

governmentexpendituresNote

maturities

are

usually

less

than

10

yearsBonds

maturities

are

10

years

or

moreAn

active

secondary

market

existsThe

30-year

bond

was

discontinued

inOctober

200112Treasury

and

Federal

AgencyBonds

(cont’d)Treasury

bond

auctionNormally

held

in

the

middle

of

eachquarterFinancial

institutions

submit

bids

for

theirown

accounts

or

for

clientsBids

can

be

competitive

or

petitiveCompetitive

bids

specify

a

price

the

bidderis

willing

to

pay

and

a

dollar

amount

ofsecurities

to

be

purchased13Treasury

and

Federal

AgencyBonds

(cont’d)Treasury

bond

auction

(cont’d)The

Salomon

Brothers

scandalIn

a

1990

bond

auction,

Salomon

Brothers

purchased65

percent

of

the

bonds

issued

(exceeding

the

35percent

maximum)Salomon

resold

the

bonds

at

higher

prices

to

otherinstitutionsIn

August

of

1991,

the

Treasury

Departmenttemporarily

barred

Salomon

Brothers

from

bidding

onTreasury

securitiesIn

May

1992

Salomon

paid

fines

of

$190

million

to

theSECandJusticeDepartmentSalomon

created

a

reserve

fund

of

$100

million

tocover

claims

from

civillawsuits14Treasury

and

Federal

AgencyBonds

(cont’d)Trading

Treasury

bondsBond

dealers

serve

as

intermediaries

in

thesecondary

market

and

also

take

positions

in

thebonds30

primary

dealers

dominate

the

tradingProfit

from

the

bid-ask

spreadConduct

trading

with

the

Fed

during

openmarket

operationsTypical

daily

volume

is

about

$200

billionOnline

tradingTreasuryDirect

program

(

)Treasury

and

Federal

AgencyBonds

(cont’d)15Stripped

Treasury

bondsOne

security

represents

the

principal

payment

and

asecond

security

represents

the

interest

paymentsInvestors

who

desire

a

lump

sum

payment

can

choose

thePO

partInvestors

desiring

periodic

cash

flows

can

select

the

IO

partDegrees

of

interest

rate

sensitivity

varySeveral

securities

firms

create

their

own

versions

ofstripped

securitiesMerrill

Lynch’s

TIGRsThe

Treasury

created

the

STRIPSprogram

in

1985Treasury

and

Federal

AgencyBonds

(cont’d)16Inflation-indexed

Treasury

bondsIn

1996,

the

Treasury

started

issuing

inflation-indexedbonds

that

provide

a

return

tied

to

the

inflation

rateThe

coupon

rate

is

lower

than

the

rate

on

regularTreasuries,

but

the

principal

value

increases

by

theamount

of

the

inflation

rate

every

six

monthsInflation-indexed

bonds

are

popular

in

high-inflationcountries

such

as

BrazilComputing

the

Interest

Paymentof

anInflation-Indexed

Bond17A

10-year

bond

has

a

par

value

of

$1,000

and

acoupon

rate

of

5

percent.

During

the

first

sixmonths

after

the

bond

was

issued,

the

inflationrate

was

1.3

percent.

By

how

much

does

theprincipal

of

the

bond

increase?

What

is

thecoupon

payment

after

six

months?Principal

$1,000

1.013

$1,013

Coupon

Payment

5%

$1,013

$50.65Treasury

and

Federal

AgencyBonds

(cont’d)18Savings

bondsIssued

by

theTreasuryHave

a30-year

maturity

and

no

secondary

marketSeries

EE

bonds

provide

a

market-based

interest

rateSeries

I

bonds

provide

a

rate

of

interest

tied

to

inflationInterest

on

savings

bonds

is

not

subject

to

state

and

localtaxesFederal

agency

bondsGinnie

Mae

issues

bonds

and

purchases

mortgages

thatareinsured

by

the

FHAand

the

VAFreddie

Mac

issues

bonds

and

purchases

conventionalmortgagesFannie

Mae

issues

bonds

and

purchases

residentialmortgagesMunicipal

Bonds19Municipalbonds

can

be

classified

as

either

generalobligation

bonds

or

revenue

bondsGeneral

obligation

bonds

are

supported

by

hemunicipal

government’s

ability

to

taxRevenue

bonds

are

supported

by

the

revenues

of

theproject

for

which

the

bonds

were

issuedMunicipal

bonds

typically

pay

interest

semiannually,with

minimum

denominations

of

$5,000Municipal

bonds

havea

secondary

marketMost

municipal

bonds

contain

a

call

provisionMunicipal

Bonds

(cont’d)20Credit

riskLess

than

.5

percent

of

all

municipal

bondsissued

since

1940

have

defaultedMoody’s,

Standard

and

Poor’s,

and

FitchInvestor

Service

assign

ratings

to

municipalbondsSome

municipal

bonds

are

insured

againstdefaultResults

in

a

higher

cost

for

the

investorMunicipal

Bonds

(cont’d)21Tax

advantagesInterest e

is

normally

exempt

from

federal

taxesInterest e

earned

on

bonds

that

are

issued

by

amunicipality

within

a

particular

state

is

exemptfrom

state e

taxesInterest e

earned

on

bonds

issued

by

amunicipality

within

a

city

in

which

the

localgovernment

imposes

taxes

is

normally

exemptfrom

the

local

taxesCorporate

Bonds22Corporations

issue

corporate

bonds

to

borrow

for

long-termperiodsCorporate

bonds

have

a

minimum

denomination

of

$1,000Larger

bonds

offerings

are

achieved

through

public

offeringsregisteredwiththeSECSecondary

market

activity

variesFinancial

andnonfinancialinstitutionsaswellasindividualsare

common

purchasersMost

corporate

bonds

have

maturities

between

10

and

30yearsInterest

paid

by

corporations

is

tax-deductible,

which

reducesthe

corporate

cost

of

financing

with

bonds23Corporate

Bonds

(cont’d)Corporate

bond

yields

and

riskInterest e

earned

on

corporate

representsordinary

eYield

curveAffected

by

interest

rate

expectations,

a

liquiditypremium,

and

maturity

preferences

ofcorporationsSimilar

shape

as

the

municipal

bond

yield

curveDefault

rateDepends

on

economic

conditionsLess

than

1

percent

in

the

late

1990sExceeded

3

percent

in

2002Corporate

Bonds

(cont’d)24Corporate

bond

yields

and

risk

(cont’d)Investor

assessment

of

riskInvestors

may

only

consider

purchasing

corporatebonds

after

assessing

the

issuing

firm’s

financialcondition

and

ability

to

cover

its

debt

paymentsInvestors

may

rely

heavily

on

financial

statementscreated

by

the

issuing

firm,

which

may

bemisleadingCorporate

Bonds

(cont’d)25Bond

ratingsBonds

with

higher

ratings

have

lower

yieldsCorporations

seek

investment-grade

ratings,

sincecommercial

banks

will

only

invest

in

bonds

withthat

statusRating

agencies

will

not

necessarily

detect

anymisleading

information

contained

in

financialstatementsCorporate

Bonds

(cont’d)26Private

placement

of

corporate

bondsOften,

insurance

companies

and

pensionfunds

purchase

privately-placed

bondsBonds

can

be

placed

with

the

help

of

asecurities

firmBonds

do

not

have

to

be

registered

with

theSEC27Corporate

Bonds

(cont’d)Low-

and

zero-coupon

bonds:Are

issued

at

a

deep

discount

from

par

valueRequire

annual

tax

payments

although

the

interest

will

notbereceived

until

maturityHave

the

advantage

to

the

issuer

of

requiring

low

or

nocashoutflowVariable-rate

bonds:Allow

investors

to

benefit

from

rising

market

interest

rates

overtimeAllow

issuers

of

bonds

to

benefit

from

declining

rates

overtimeConvertibilityConvertible

bonds

allow

investors

to

exchange

the

bond

for

astated

number

of

shares

of

common

stockInvestors

are

willing

to

accept

a

lower

rate

of

interest

onconvertible

bonds28Corporate

Bonds

(cont’d)Trading

corporate

bondsBonds

are

traded

through

brokers,

who

communicateorders

to

bond

dealersA

market

order

transaction

occurs

at

the

prevailingmarket

priceA

limit

order

transaction

will

occur

only

if

the

pricereaches

a

specified

limitBonds

listed

on

the

NYSE

are

traded

through

theautomated

Bond

System

(ABS)Online

trading

is

possible

at:Corporate

Bonds

(cont’d)29Corporate

bond

quotationsMore

than

2,000

bonds

are

traded

on

theNYSE

with

a

market

value

of

more

than

$2trillionCorporate

bond

prices

are

reported

in

eighthsCorporate

bond

quotations

normally

includethe

volume

of

trading

and

the

yield

to

maturityCorporate

Bonds

(cont’d)30How

corporate

bonds

facilitaterestructuringUsing

bonds

to

finance

a

leveraged

buyoutAn

LBO

is

typically

financed

with

senior

debt

andsubordinated

debtLBO

activity

increased

dramatically

in

the

later1980sMany

firms

with

excessive

financial

leverageresulting

from

LBOs

reissued

stock

in

the

1990sCorporate

Bonds

(cont’d)31How

corporate

bonds

facilitate

restructuring(cont’d)Using

bonds

to

revise

the

capital

structureDebt

is

perceived

to

be

a

cheaper

source

of

capital

thanequity

as

long

as

the

corporation

can

meet

its

debt

paymentsSometimes,

corporations

issue

bonds

and

use

theproceedsfor

adebt-for-equity

swapCorporations

with

an

excessive

amount

of

debt

can

conductan

equity-for-debtswapInstitutional

Use

of

BondMarkets32All

financial

institutions

participate

in

bondmarkets

On

any

given

day,

commercial

banks,

bond

mutualfunds,

insurance

companies,

and

pension

funds

aredominant

participantsA

financial

institution’s

investment

decisions

willoften

simultaneously

affect

bond

market

andother

financial

market

activityGlobalization

of

Bond

Markets33Bond

markets

have e

increasingly

integrated

asa

result

of

frequent

cross-border

investments

inbondsLow-quality

bonds

issued

globally

bygovernments

and

large

corporations

are

globaljunk

bondsThe

global

development

of

the

bond

market

isprimarily

attributed

to

bond

offerings

by

countrygovernments

(sovereign

bonds)Globalization

of

BondMarkets(cont’d)34Eurobond

marketBonds

denominated

in

various

currencies

areplaced

in

the

Eurob