51 Fixed-Income Issuance and Trading

The CFO of Premlow Insurance Co. should invest in long-term, investment-grade securities to align with the company's claims history and obligations.

Insurance companies need to ensure they have funds to pay claims when due.

Investment-grade securities are considered the safest and provide a stable income stream, which is important for ongoing insurance claims.

Investment-grade securities are deemed the safest by rating agencies.

The bid price posted by a dealer on an older, relatively illiquid bond will most likely be 15 basis points lower than the ask price.

Illiquid bonds traded on the secondary market have a wider spread between the bid (lower) and ask (higher) prices compared to newer, more liquid bonds.

The spread for older, less liquid bonds can be up to 1020 basis points, while newer, more liquid bonds may have a spread of less than a basis point.

An analyst evaluating fixed-income and equity indices will find that the turnover is higher for fixed-income indices relative to equity indices.

Bonds have maturity dates, unlike equities.

New bonds are regularly issued relative to equities.

The turnover (removal and replacement of constituents) is higher for fixed-income indices versus equity indices.

Fixed income classifications by issuer most likely include financial sector bonds.

Corporate bonds are frequently classified by issuer as financial or non-financial.

Floating-rate bonds are a classification by coupon structure.

Money market securities are a classification by original maturities.

Ridgeland Company wishes to issue its first bond to high-net-worth investors, with the underwriter guaranteeing the bond issue price - private placement as a debut issuer describes this bond issuance.

A private placement is when a bond is only available to specific investors.

A first-ever bond offering is referred to as a debut issuer.

A guarantee of the bond issue price by the underwriter indicates an "underwritten offering."

Shelf registration allows bonds to be issued over time, and there is no indication that this is the intention.

If a company's CFO aims to add more debt to the company's capital structure over several years, they will most likely use shelf registration.

Through a shelf registration, a bond issue is registered in aggregate with securities regulators.

The bonds are then issued over a period of time, dependent upon when the issuer needs to raise the funds.

Best-efforts offerings do not guarantee the issue price.

In an underwritten offering, financial intermediaries guarantee the bond issue.

A fixed-income investor who is interested in high-yield bonds and is willing to take on the risk associated with non-investment-grade securities will most likely find bonds with an S&P rating of BB+ in his portfolio.

Investment-grade bonds are the safest investments and have the lowest yields.

S&P ratings ranging from AAA to BBB- and Moody's ratings ranging from Aaa to Baa3 are considered investment grade.

An S&P rating of BB+ is considered non-investment grade and carries greater risk, for investors interested in high-yield bonds willing to take on more risk.

Jacob Sands, CFA, should describe distressed debt as having a low credit rating, high risk, and high yield to his client.

Distressed debt is debt from an issuer in bankruptcy or expected to be in bankruptcy soon.

This debt carries a low credit rating and is considered high risk.

Investors expect high returns on higher risk investments, so the yields will be high if the issuer makes the interest and principal payments when due.

When recommending a bond fund, Dave Kats, CFA, will look for an index that matches the exposure of the bond fund in credit quality.

An index used as a benchmark for a bond fund should match the exposure of the fund in terms of credit quality, sector focus, and maturity.

Duration and volatility are not specifically identified as exposures that need to be matched by an index fund benchmark.

An investor who wishes to purchase asset-backed commercial paper (ABCP) will be choosing an investment that is short term and investment grade.

ABCP is commercial paper with a maturity of less than a year, making it short term.

ABCP is collateralized by financial assets such as receivables.

ABCP is considered investment grade due to its high credit ratings and collateralization.

An analyst is likely to see a fixed-income index focused on geography.

A fixed-income index may focus on geography, credit quality, sector, or maturity.

Coupon rate ranges and equity correlations are unlikely to be a focus in the development of a fixed-income index.

Ashley James should accurately describe to her client that an aggregate bond index, like the Bloomberg Barclays Aggregate Index, includes bonds from many sectors and currencies.

The Bloomberg Barclays Aggregate Index has bonds across 28 currencies.

There are minimum size thresholds for bonds to be included in the index.

High-yield and unrated bond issuances are excluded.

A purchase of a new bond issue by a single investor is most accurately described as a private placement.

In a private placement, an entire bond issue is sold to a single investor or a small group of investors, rather than being offered to the public.

The planner's response will most likely be that the tracker fund uses sampling to minimize transaction complexity.

A bond tracker fund will use sampling to mirror a fixed-income index construction.

Fixed-income indices have many more constituents than equity indices, and sampling will keep the transaction complexity reasonable.

The Federal Reserve Bank of the United States sells Treasury securities with maturities in the 1 year to 10 years range.

The Federal Reserve Bank is a central bank, and the monetary policy tool it is using to reduce the money supply is the sale of intermediate-term (1 to 10-year) Treasury notes.

The bid-ask spread for a bond most likely conveys information about its liquidity but not its credit quality.

Bond dealers' bid-ask spreads depend primarily on the liquidity of an issue.

Spreads are narrower for highly liquid issues and wider for less liquid issues.

Credit quality and liquidity are both reflected in yield spreads.

Aggregate bond indexes are most likely to have large weights in sovereign bonds.

Aggregate indexes contain a broad selection of bonds across sectors and currencies.

Sovereign governments are the largest issuers of bonds, so they typically have the largest weight in broad bond indexes.

Bonds mature and must be replaced in indexes more frequently than equities, so aggregate bond indexes must have more turnover than broad equity indexes.

Lakecot's debt is best described as a debut issue.

Debut issues are new and often require time for underwriters to market them to investors through roadshows.

A shelf registration is for a bond issued over time rather than all at once.

A repeat issue does not typically require months of roadshows and marketing efforts to investors.

The bonds in the analyst's portfolio are best described as fallen angels.

Fallen angels are bonds associated with issuers that previously held investment-grade ratings but have since been downgraded to below investment grade.

Yields would increase as the bond is downgraded to below investment grade.

Sovereign issuers are most likely to issue bonds by auction.

National governments use auctions to issue sovereign bonds.

Corporate bonds are typically issued in an underwriting or private placement process.

Municipal bonds are typically issued in a negotiated or underwritten process.

The bond is most likely relatively illiquid.

The spread between the bid and ask prices is one-half percent of par, which most likely reflects an illiquid market for this bond.

Bonds with liquid secondary markets typically have bid-ask spreads of approximately 10 to 12 basis points.