Chapter Seven The Money and Bond Markets

The Rate of Interest Factors affecting the rate of interest include: Risk Maturity Expectations Liquidity Supply and demand Inflation

Credit Ratings Some markets (e.g.; the U.S.) want the credit rating of the borrower officially assessed to guide them as to the risk and the appropriate rate of interest The most important credit rating agencies are Standard & Poor’s (McGraw-Hill), Moody’s Investors Service (Dun & Bradstreet) and Fitch Ratings

Credit Ratings (cont.) To quote Standard & Poor’s (S&P), the ratings are based, in varying degrees, on the following considerations: Likelihood of default – capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation Nature and provisions of the obligation Protection afforded to, and relative position of, the obligation - in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’ rights

Credit Ratings (cont.) The full list for Standard & Poors is: AAA AA A BBB BB B CCC CC C C1 D

Credit Ratings (cont.) A bond rated ‘D’ is either in default or expected to default Bonds rated BBB and above are investment grade

Domestic Money Markets Borrowing/lending of money for one year or less It includes: Call money The interbank market Money market securities Treasury bills Local authority/public utility bills Certificates of deposit Commercial paper Bills of exchange

International Commercial Paper Issuance December 2011 Market Amount outstanding $ billion _____________________________________________________________________________________________ TOTAL By currency US dollar Euro223.7 Yen 2.0 Pound sterling Swiss franc 10.1 Canadian dollar 1.0 Other currencies19.1 By issuer Financial institutions Governments 32.7 International organizations 28.0 Corporate issuers 31.9 TOTAL Domestic issues 1,713 ____________________________________________________________________________________________________ Source: BIS Quarterly Review (2012) March

Domestic Bond Markets Markets handling medium to long-term borrowing/lending The general features are: The name of the bond The nominal or par value in the currency of denomination The redemption value – usually the nominal value, but there are other possibilities (e.g.; index linking) The rate of interest expressed as a percentage of nominal value; this is called the ‘coupon’ The frequency of payment The redemption date

Domestic Bond Markets (cont.) There are several types of bond according to the issuer: Government bonds Local authority/public utility bonds Mortgage and other asset-backed bonds Corporate bonds Foreign bonds Junk bonds

International Markets International or Euromarkets refer to primary market activity (loans, bonds or money market instruments) outside the domestic market of that currency, For example a U.S. Dollar loan raised in London or a U.S. Dollar bond issued in Singapore London is the major centre for these activities

Top Underwriters in International Debt, 2011 RankBank NameMarket ShareVolume ($bn)Fees (%) ____________________________________________________________________________ 1 Barclays Capital Deutsche Bank JP Morgan HSBC Ban PLC BNP Paribas Group Citi UBS Goldman Sachs & Co Bank of America /Merrill Lynch RBS ____________________________________________________________________________ Source: Bloomberg (2012) Global Fixed Income League Tables