Bond Markets and Special Purpose Vehicles (SPVs)
48 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is a key feature of a special purpose vehicle (SPV)?

  • It is formed to fulfill a specific or temporary objective. (correct)
  • It can only hold equity investments.
  • It is created for a permanent objective.
  • It issues equity instead of debt obligations.

    • Which of the following is a characteristic of plain vanilla bonds?

  • They have variable rates and long durations.
  • They have fixed terms and fixed rates. (correct)
  • They offer anonymity to the bondholders.
  • They are typically complex and hard to understand.

    • Which of the following is NOT a disadvantage of bearer bonds?

  • Requires electronic ownership records. (correct)
  • Simplicity in trading may be misleading.
  • Reduced tracking of ownership.
  • Greater risk of loss or theft.

    • What is a significant benefit of registered bonds compared to bearer bonds?

    <p>Direct communication from issuer to bondholders.</p> Signup and view all the answers

    What distinguishes a floating rate bond from a fixed rate bond?

    <p>Floating rate bonds have variable interest payments over time.</p> Signup and view all the answers

    Which entities are permitted to issue bonds on the South African market?

    <p>Foreign entities and governments.</p> Signup and view all the answers

    How can SPVs primarily benefit banks?

    <p>They allow banks to offload high-risk assets.</p> Signup and view all the answers

    Which of the following statements about the risks of bonds compared to stocks is true?

    <p>Bonds are usually less risky than stocks, providing more stability.</p> Signup and view all the answers

    What is the primary function of the JSE-Debt Market?

    <p>Facilitate the issue and trading of bonds</p> Signup and view all the answers

    Which of the following risks is NOT mitigated by trading in the JSE-Debt Market?

    <p>Liquidity risk</p> Signup and view all the answers

    In contrast to an exchange-driven market, what characteristic is typical of OTC markets?

    <p>Informal, non-exchange-driven trading</p> Signup and view all the answers

    Which of the following factors is essential to consider when investing in bonds?

    <p>Personal needs and investment goals</p> Signup and view all the answers

    What is one key advantage of an exchange-driven market like the JSE-Debt Market?

    <p>Elimination or lessening of trading risks</p> Signup and view all the answers

    What risk refers to the possibility of one party backing out of a deal in an OTC market?

    <p>Counterparty risk</p> Signup and view all the answers

    Which risk is defined as the potential for invalid securities certificates to enter the market?

    <p>Tainted scrip risk</p> Signup and view all the answers

    Which type of bond typically serves to finance government projects and operations?

    <p>Government bonds</p> Signup and view all the answers

    What is the primary obligation of a bond issuer?

    <p>To pay back the amount borrowed at maturity</p> Signup and view all the answers

    Which characteristic makes government bonds generally considered risk-free?

    <p>They are backed by the credit of a stable government</p> Signup and view all the answers

    What typically differentiates corporate bonds from government bonds?

    <p>Corporate bonds carry more risk and offer higher yields</p> Signup and view all the answers

    How are bonds primarily traded in the market?

    <p>Over the counter (OTC)</p> Signup and view all the answers

    What is one potential drawback of investing in bonds compared to stocks?

    <p>Bonds lack long-term growth potential</p> Signup and view all the answers

    Which type of bonds are issued by municipalities and cities?

    <p>Municipal bonds</p> Signup and view all the answers

    In terms of risk and return, what is generally true for sovereign debt compared to corporate bonds?

    <p>Sovereign debt is considered lower risk with lower yields</p> Signup and view all the answers

    What distinguishes callable bonds from other types of corporate bonds?

    <p>They can be redeemed by the issuer before maturity</p> Signup and view all the answers

    What is a significant disadvantage of bearer bonds compared to registered bonds?

    <p>Higher risk of loss or theft</p> Signup and view all the answers

    Which of the following statements accurately contrasts floating rate bonds and fixed rate bonds?

    <p>Floating rate bonds pay interest that changes with market rates, while fixed rate bonds do not.</p> Signup and view all the answers

    What is the primary reason for a sponsor to create a special purpose vehicle (SPV)?

    <p>To fulfill a specific or temporary objective</p> Signup and view all the answers

    In what way do registered bonds provide increased protection for bondholders compared to bearer bonds?

    <p>Ownership is recorded electronically.</p> Signup and view all the answers

    Foreign bonds issued in South Africa are denominated in which currency?

    <p>ZAR</p> Signup and view all the answers

    Which risk is commonly associated with corporate bonds compared to government bonds?

    <p>Increased credit risk of default</p> Signup and view all the answers

    What is a defining feature of plain vanilla bonds that makes them widely recognized?

    <p>Fixed term and fixed rate characteristics</p> Signup and view all the answers

    Which of the following types of bonds serves primarily to finance specific governmental projects?

    <p>Municipal bonds</p> Signup and view all the answers

    Which factor primarily influences an issuer's decision to list their debt securities on the JSE-Debt Market?

    <p>Increased market visibility</p> Signup and view all the answers

    What advantage does the JSE-Debt Market provide in terms of counterparty risk?

    <p>Counterparty risk is minimized through member surveillance</p> Signup and view all the answers

    How does the presence of a guarantee fund in the JSE-Debt Market affect member fraud risk?

    <p>It provides compensation for investor losses due to fraud</p> Signup and view all the answers

    Which of the following describes a key risk associated with trading in OTC markets?

    <p>The risk of non-valid securities certificates</p> Signup and view all the answers

    What is a primary reason that bonds are traded in the debt market rather than other markets?

    <p>The debt market specializes in issuing and trading bonds</p> Signup and view all the answers

    How should investors primarily assess their options before trading bonds?

    <p>By evaluating personal needs and investment goals</p> Signup and view all the answers

    Which statement accurately reflects the risk differentiation between bonds and stocks?

    <p>Bonds typically provide lower returns with less risk than stocks.</p> Signup and view all the answers

    Which factor typically distinguishes government bonds from corporate bonds?

    <p>The credit rating of the issuer</p> Signup and view all the answers

    What is a significant characteristic of bonds compared to stocks?

    <p>Bonds provide guaranteed payments of face value at maturity.</p> Signup and view all the answers

    Why are government bonds typically considered risk-free in developed countries?

    <p>They are supported by the credit of a stable government.</p> Signup and view all the answers

    What distinguishes corporate bonds from government bonds?

    <p>Corporate bonds tend to provide higher yields but carry more risk.</p> Signup and view all the answers

    What type of bond is typically issued by local authorities?

    <p>Municipal bonds</p> Signup and view all the answers

    What is a major drawback of investing in bonds compared to stocks?

    <p>Bonds typically have lower long-term growth potential.</p> Signup and view all the answers

    What are convertible bonds primarily characterized by?

    <p>Their ability to be converted into equity at a set price.</p> Signup and view all the answers

    What is one identified risk of bonds compared to stocks?

    <p>Bonds can lead to inflation risk impacting returns.</p> Signup and view all the answers

    Which of the following is a type of bond issued by public enterprises?

    <p>Parastatal bonds</p> Signup and view all the answers

    Study Notes

    Special Purpose Vehicles (SPVs)

    • An SPV is a corporate entity created by a sponsor (like a bank) for a specific, often temporary, purpose.
    • Typically set up to remove certain assets from the sponsor's balance sheet, allowing capital release for other lending.
    • SPVs issue debt securities (bonds) which are backed by the cash flow generated by the underlying assets.

    Foreign Sector Entities

    • Foreign entities and governments can issue bonds in South Africa, denominated in South African Rand (ZAR).
    • These bonds are known as foreign bonds, with examples including:
      • Swaziland Posts and Telecommunications Corporation
      • Mauritius Commercial Bank Limited
      • Namibia Power

    Types of Bonds

    Plain Vanilla Bonds

    • Characterized by fixed terms and fixed interest rates, making them straightforward for investors.
    • Serves as a benchmark in the bond market due to its simplicity and stability.

    Bearer Bonds vs. Registered Bonds

    • Bearer Bonds:
      • Pros include anonymity, easy transferability, and simple trading.
      • Cons feature higher risks of loss or theft and challenges in tracking ownership.
    • Registered Bonds:
      • Pros comprise reduced loss risks thanks to electronic registration and direct communication from issuers.
      • Cons involve less anonymity and potentially more cumbersome transfer processes.

    Floating Rate Bonds vs. Fixed Rate Bonds

    • Floating rate bonds, or floating rate notes (FRNs), differ from fixed rate bonds with their interest rates that fluctuate over time.

    JSE-Debt Market (JSE-DM)

    • The JSE-Debt Market evolved as more stockbrokers engaged in bond trading, leading to developing intricate rules for market conduct.
    • While issuers are not legally required to list debt on the JSE-Debt Market, a listing generally enhances demand.
    • Benefits of an exchange-driven market include:
      • Reduction in trading risks (counterparty, settlement, member fraud, and tainted scrip risks).
      • Efficient settlements handled by the exchange's clearing and settlement agency (STRATE).

    Over-The-Counter (OTC) Market Risks

    • OTC markets entail various risks such as:
      • Settlement risk: deals not settled promptly.
      • Counterparty risk: a party backing out of a deal.
      • Member fraud risk: intermediaries mismanaging transactions.
      • Tainted scrip risk: invalid securities introduced into the market.

    Trading Bonds

    • Investors should assess personal needs and investment objectives before buying bonds.
    • Bonds offer fixed income guarantees and are typically perceived as less risky compared to stocks, albeit with lower long-term growth potential.
    • Primarily sold in OTC markets rather than localized exchanges.

    Bond Issuers

    Government Bonds

    • Issued by governments and known as sovereign debt.
    • Considered "risk-free" in developed nations due to stable government backing, predicting low default rates.
    • Typically offer lower interest rates relative to other fixed-income options.

    Municipal Bonds

    • Issued by local authorities, municipalities, and cities.

    Corporate Bonds

    • Issued by companies with generally higher risk but greater potential yields.
    • Includes specialized types such as convertible bonds and callable bonds.

    Parastatal Bonds

    • Bonds issued by state-owned enterprises and classified as public enterprise bonds.
    • Limited borrowing participation among these entities in the bond market.

    Special Purpose Vehicles (SPVs)

    • An SPV is a corporate entity created by a sponsor (like a bank) for a specific, often temporary, purpose.
    • Typically set up to remove certain assets from the sponsor's balance sheet, allowing capital release for other lending.
    • SPVs issue debt securities (bonds) which are backed by the cash flow generated by the underlying assets.

    Foreign Sector Entities

    • Foreign entities and governments can issue bonds in South Africa, denominated in South African Rand (ZAR).
    • These bonds are known as foreign bonds, with examples including:
      • Swaziland Posts and Telecommunications Corporation
      • Mauritius Commercial Bank Limited
      • Namibia Power

    Types of Bonds

    Plain Vanilla Bonds

    • Characterized by fixed terms and fixed interest rates, making them straightforward for investors.
    • Serves as a benchmark in the bond market due to its simplicity and stability.

    Bearer Bonds vs. Registered Bonds

    • Bearer Bonds:
      • Pros include anonymity, easy transferability, and simple trading.
      • Cons feature higher risks of loss or theft and challenges in tracking ownership.
    • Registered Bonds:
      • Pros comprise reduced loss risks thanks to electronic registration and direct communication from issuers.
      • Cons involve less anonymity and potentially more cumbersome transfer processes.

    Floating Rate Bonds vs. Fixed Rate Bonds

    • Floating rate bonds, or floating rate notes (FRNs), differ from fixed rate bonds with their interest rates that fluctuate over time.

    JSE-Debt Market (JSE-DM)

    • The JSE-Debt Market evolved as more stockbrokers engaged in bond trading, leading to developing intricate rules for market conduct.
    • While issuers are not legally required to list debt on the JSE-Debt Market, a listing generally enhances demand.
    • Benefits of an exchange-driven market include:
      • Reduction in trading risks (counterparty, settlement, member fraud, and tainted scrip risks).
      • Efficient settlements handled by the exchange's clearing and settlement agency (STRATE).

    Over-The-Counter (OTC) Market Risks

    • OTC markets entail various risks such as:
      • Settlement risk: deals not settled promptly.
      • Counterparty risk: a party backing out of a deal.
      • Member fraud risk: intermediaries mismanaging transactions.
      • Tainted scrip risk: invalid securities introduced into the market.

    Trading Bonds

    • Investors should assess personal needs and investment objectives before buying bonds.
    • Bonds offer fixed income guarantees and are typically perceived as less risky compared to stocks, albeit with lower long-term growth potential.
    • Primarily sold in OTC markets rather than localized exchanges.

    Bond Issuers

    Government Bonds

    • Issued by governments and known as sovereign debt.
    • Considered "risk-free" in developed nations due to stable government backing, predicting low default rates.
    • Typically offer lower interest rates relative to other fixed-income options.

    Municipal Bonds

    • Issued by local authorities, municipalities, and cities.

    Corporate Bonds

    • Issued by companies with generally higher risk but greater potential yields.
    • Includes specialized types such as convertible bonds and callable bonds.

    Parastatal Bonds

    • Bonds issued by state-owned enterprises and classified as public enterprise bonds.
    • Limited borrowing participation among these entities in the bond market.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    This quiz covers the fundamentals of Special Purpose Vehicles (SPVs), including their purpose and structure. Additionally, learn about foreign sector entities in South Africa that issue bonds, along with the types of bonds such as plain vanilla, bearer, and registered bonds. Test your knowledge on these important financial instruments.

    More Like This

    Use Quizgecko on...
    Browser
    Open
    Browser
    Browser