Podcast
Questions and Answers
What is a key feature of a special purpose vehicle (SPV)?
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?
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?
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?
What is a significant benefit of registered bonds compared to bearer bonds?
What distinguishes a floating rate bond from a fixed rate bond?
What distinguishes a floating rate bond from a fixed rate bond?
Which entities are permitted to issue bonds on the South African market?
Which entities are permitted to issue bonds on the South African market?
How can SPVs primarily benefit banks?
How can SPVs primarily benefit banks?
Which of the following statements about the risks of bonds compared to stocks is true?
Which of the following statements about the risks of bonds compared to stocks is true?
What is the primary function of the JSE-Debt Market?
What is the primary function of the JSE-Debt Market?
Which of the following risks is NOT mitigated by trading in the JSE-Debt Market?
Which of the following risks is NOT mitigated by trading in the JSE-Debt Market?
In contrast to an exchange-driven market, what characteristic is typical of OTC markets?
In contrast to an exchange-driven market, what characteristic is typical of OTC markets?
Which of the following factors is essential to consider when investing in bonds?
Which of the following factors is essential to consider when investing in bonds?
What is one key advantage of an exchange-driven market like the JSE-Debt Market?
What is one key advantage of an exchange-driven market like the JSE-Debt Market?
What risk refers to the possibility of one party backing out of a deal in an OTC market?
What risk refers to the possibility of one party backing out of a deal in an OTC market?
Which risk is defined as the potential for invalid securities certificates to enter the market?
Which risk is defined as the potential for invalid securities certificates to enter the market?
Which type of bond typically serves to finance government projects and operations?
Which type of bond typically serves to finance government projects and operations?
What is the primary obligation of a bond issuer?
What is the primary obligation of a bond issuer?
Which characteristic makes government bonds generally considered risk-free?
Which characteristic makes government bonds generally considered risk-free?
What typically differentiates corporate bonds from government bonds?
What typically differentiates corporate bonds from government bonds?
How are bonds primarily traded in the market?
How are bonds primarily traded in the market?
What is one potential drawback of investing in bonds compared to stocks?
What is one potential drawback of investing in bonds compared to stocks?
Which type of bonds are issued by municipalities and cities?
Which type of bonds are issued by municipalities and cities?
In terms of risk and return, what is generally true for sovereign debt compared to corporate bonds?
In terms of risk and return, what is generally true for sovereign debt compared to corporate bonds?
What distinguishes callable bonds from other types of corporate bonds?
What distinguishes callable bonds from other types of corporate bonds?
What is a significant disadvantage of bearer bonds compared to registered bonds?
What is a significant disadvantage of bearer bonds compared to registered bonds?
Which of the following statements accurately contrasts floating rate bonds and fixed rate bonds?
Which of the following statements accurately contrasts floating rate bonds and fixed rate bonds?
What is the primary reason for a sponsor to create a special purpose vehicle (SPV)?
What is the primary reason for a sponsor to create a special purpose vehicle (SPV)?
In what way do registered bonds provide increased protection for bondholders compared to bearer bonds?
In what way do registered bonds provide increased protection for bondholders compared to bearer bonds?
Foreign bonds issued in South Africa are denominated in which currency?
Foreign bonds issued in South Africa are denominated in which currency?
Which risk is commonly associated with corporate bonds compared to government bonds?
Which risk is commonly associated with corporate bonds compared to government bonds?
What is a defining feature of plain vanilla bonds that makes them widely recognized?
What is a defining feature of plain vanilla bonds that makes them widely recognized?
Which of the following types of bonds serves primarily to finance specific governmental projects?
Which of the following types of bonds serves primarily to finance specific governmental projects?
Which factor primarily influences an issuer's decision to list their debt securities on the JSE-Debt Market?
Which factor primarily influences an issuer's decision to list their debt securities on the JSE-Debt Market?
What advantage does the JSE-Debt Market provide in terms of counterparty risk?
What advantage does the JSE-Debt Market provide in terms of counterparty risk?
How does the presence of a guarantee fund in the JSE-Debt Market affect member fraud risk?
How does the presence of a guarantee fund in the JSE-Debt Market affect member fraud risk?
Which of the following describes a key risk associated with trading in OTC markets?
Which of the following describes a key risk associated with trading in OTC markets?
What is a primary reason that bonds are traded in the debt market rather than other markets?
What is a primary reason that bonds are traded in the debt market rather than other markets?
How should investors primarily assess their options before trading bonds?
How should investors primarily assess their options before trading bonds?
Which statement accurately reflects the risk differentiation between bonds and stocks?
Which statement accurately reflects the risk differentiation between bonds and stocks?
Which factor typically distinguishes government bonds from corporate bonds?
Which factor typically distinguishes government bonds from corporate bonds?
What is a significant characteristic of bonds compared to stocks?
What is a significant characteristic of bonds compared to stocks?
Why are government bonds typically considered risk-free in developed countries?
Why are government bonds typically considered risk-free in developed countries?
What distinguishes corporate bonds from government bonds?
What distinguishes corporate bonds from government bonds?
What type of bond is typically issued by local authorities?
What type of bond is typically issued by local authorities?
What is a major drawback of investing in bonds compared to stocks?
What is a major drawback of investing in bonds compared to stocks?
What are convertible bonds primarily characterized by?
What are convertible bonds primarily characterized by?
What is one identified risk of bonds compared to stocks?
What is one identified risk of bonds compared to stocks?
Which of the following is a type of bond issued by public enterprises?
Which of the following is a type of bond issued by public enterprises?
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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.
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