107
CHAPTER 2
FIXED-INCOME MARKETS:
ISSUANCE, TRADING,
AND FUNDING
SOLUTIONS
amount of bonds outstanding is the non- nancial corporate sector.
Ratings of Baa3 or above by Moody’s Investors Service or BBB– or above by Standard &
Poor’s and Fitch Ratings are considered investment grade, whereas ratings below these
levels are referred to as non-investment grade (also called high yield, speculative, or junk).
another country. C is incorrect because municipal bonds are US domestic bonds issued by
a state or local government.
kets bonds to compensate investors for the higher risk. C is incorrect because emerging
markets bonds usually bene t from higher (not lower) growth prospects than developed
markets bonds.
108 Part II: Solutions
currency denomination, but one of the most widely used set of reference rates is Libor. A
and C are incorrect because a bond’s spread and frequency of coupon payments are typi-
cally set when the bond is issued and do not change during the bond’s life.
correct because an interbank o ered rate such as Libor or Euribor is a set of reference rates
(not a single reference rate) for di erent borrowing periods of up to one year (not 10 years).
where an investment bank acts as a broker and receives a commission for selling the bonds
to investors, and incurs less risk associated with selling the bonds, is a best e orts o ering
(not an underwritten o ering).
via private placements or best e ort o erings.
grey market is a forward market for bonds about to be issued. C is incorrect because a
private placement is a non-underwritten, unregistered o ering of bonds that are not sold
to the general public but directly to an investor or a small group of investors.
major participants in secondary bond markets globally are large institutional investors and
central banks (not retail investors).
erations refer to central bank activities in secondary bond markets. Central banks buy
and sell bonds, usually sovereign bonds issued by the national government, as a means to
implement monetary policy.
investor, or that the investor will not face a loss on his or her investment.
non-sovereign (not sovereign) bonds. B is incorrect because sovereign bonds are typically
unsecured (not secured) obligations of a national government.
Chapter 2 Fixed-Income Markets: Issuance, Trading, and Funding 109
issue non-sovereign and sovereign bonds, respectively.
respectively.
largest issues. B is incorrect because commercial paper is issued by companies across the
risk spectrum, although only the strongest, highly rated companies issue low-cost commer-
cial paper.
incorrect because Eurocommercial paper is more frequently issued on an interest-bearing
(or yield) basis than on a discount basis.
sinking fund arrangement has no e ect on in ation risk or interest rate risk.
wholesale funds).
banks, whereas small-denomination CDs are not. C is incorrect because a penalty is
imposed if the depositor withdraws funds prior to maturity for non-negotiable (instead
of negotiable) CDs.
are incorrect because interbank deposits and negotiable certi cates of deposit are unse-
cured deposits—that is, there is no collateral backing the deposit.
is usually higher (not lower) when the maturity of the repurchase agreement is long and
when the credit risk associated with the underlying collateral is high.