Money Market (fixed income)
A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market is used by participants as a means for borrowing and lending in the short term, from several days to just under a y
Bond Market (fixed income)
The environment in which the issuance and trading of debt securities occurs. The bond market primarily includes government-issued securities and corporate debt securities, and facilitates the transfer of capital from savers to the issuers or organizations
Foreign Exchange Market
The market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and invest
Spot (cash) Markets
A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective
Derivatives Market
financial market for derivatives , financial instruments like futures, forwards, options and swaps.
Eurocurrency Market
The money market where currency held outside of the country where it is legal tender (term) is borrowed and lent by banks in Europe. The market is utilized by large firms and extremely wealthy individuals who wish to circumvent regulatory requirements, ta
Eurocredit (international syndicated loans) Market**
The term "Eurocredit" refers to loans in a currency that is not the lending bank's national currency. Eurocredit loans are large and long-term, and usually only large corporations and government agencies request them. Banks that extend these loans usually
Eurobond Market
A bond issued in a currency other than the currency of the country or market in which it is issued. The market that it is bought and sold in.
Euro CP and Euronote Market
An unsecured, short-term loan issued by a bank or corporation in the international money market, denominated in a currency that differs from the corporation's domestic currency - Euro commerical paper.
Foreign Bond (1 of 3 main types of international bonds)
(HIS DEFINITION) - bonds issued by foreign issuers in national bond markets subject to the market country's securities laws and underwriting rules
A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. A foreign
Euroequity Market
Newly public companies that want to raise more money tend to issue this type of stock. Euroequity is a term used to describe an initial public offer occurring simultaneously in two different countries. The company's shares are listed in various countries
Origin of Eurocredit
Late 1960s brass plate (firms without any "real" existence other than a brass nameplate and its registered legal address) overseas branches were allowed to be established, thus permitting eurodollar CD issues my small US banks. June 1970 Reg Q was exempte
Evolution of Eurocredits
1970-82 : Most popular borrowers were governments and public sector borrowers from LDCs
1982-late 1990s: Due to LDC debt crisis, corporates from US and Europe raised funds for M&As etc while LDC Eurocredits were swapped for Brady bonds (long-term bonds re
Steps for Arranging Eurocredits
� Borrower selects the bank as the lead arranger (or lead manager) of the Eurocredit
� The mandated arranger negotiates the terms with the borrower reflecting the market conditions
� The arranger organizes the Eurocredit syndicate composed of the managers
Four S's of Eurocredits
� Sourcing - getting the mandate from a borrower by the bank, which becomes the lead manager bank. Factors to consider by a borrower in selecting the lead manager: size, reputation, commitment, experience, on-going relationship. How to get mandate from ba
Synthetic Security
CATS - Certificate of Accrual on Treasury Securities - Issued by the U.S. Treasury and stripped by a financial intermediary, these products are sold at a significant discount from face value and pay no interest during their lifetime. However, they return
Synthetic Securities
An investment bank buys regular coupon Treasury bonds, strips their interest and principal payments into separate cash flows and markets them as a series of zero-coupon synthetic treasury securities
For example - goldman sachs might buy 100mill 5% 30yr tb
Pass-through securities (certificates of ownership or participation certificates)
Investors have ownership interest in the collateralized assets (type of securitization)
Examples are MBS (mortgage backed securities), ABS (asset-backed securities), CARs (certificates for automobile recievables) and CARDs (certificates for amortizing rev
Pay-through securities (collateralized debt obligations)
Investors do not have any ownership interest in the collateralized assets but their securities are serviced by cash flows generated by the assets.
Examples are CMOS (collateralized mortgage obligations) and CDOs (collateralized debt obligations)
Collateralization
The act where a borrower pledges an asset as recourse to the lender in the event that the borrower defaults on the initial loan. Collateralization of assets gives lenders a sufficient level of reassurance against default risk, which allows loans to be iss
Yankee Bonds (Foreign Bond in US)
mostly denominated in dollars but some Canadian dollars or even euros. Long and cumbersome SEC registration requirements. Strict financial disclosure requirements such as sales and profits by products, regions, etc.
Foreign Bonds US regulations
1982: Rule 415 - shelf registration to shorten launch periods. A regulation that a corporation can evoke to comply with U.S. Securities and Exchange Commission (SEC) registration requirements for a new stock offering up to three years before doing the act
Samurai Bonds (1970, "foreign bonds in Japan")
Foreign bonds issued in Japan denominated Yen. A yen-denominated bond issued in Tokyo by a non-Japanese company and subject to Japanese regulations. Other types of yen-denominated bonds are Euroyens issued in countries other than Japan. Samurai bonds give
Geisha Bonds (1985, aka Shogun Bonds, Foreign bonds in japan)
issued by the World Bank, denominated in US dollars. A type of foreign-currency denominated bond that is issued in Japan by foreign entities. Organizations such as the World Bank have issued such debt instruments in the past. (Key is foreign denomination
Daimyo Bonds (1987, foreign bonds in japan)
are more international form of Shogun bonds, issued in Japan but underwritten by international syndicates, listed on Luxembourg Stock Exchange and cleared through Euroclear (belgium based financial services company) and Clearstream (Clearstream Banking S.
Uridashi Bonds (Early 2000, foreign bonds in japan)
non-yen foreign bonds (mostly in US, Australia and New Zealand Dollars to give Japanese household investors a higher rate of return than the historically low domestic interest rate in Japan) but, unlike shogun bonds, targeted not at institutional investor
Sushi Bonds (foreign bonds in japan)
non-yen (mostly US dollar-denominated) eurobonds issued by Japanese issuers and thus allowing Japanese institutional investors to buy them without the 10% foreign asset limit consideration.
A bond issued by a Japanese issuer in a market outside Japan and
Other foreign bonds
Bulldog- These sterling bonds are referred to as bulldog bonds as the bulldog is a national symbol of England. The sterling is considered the third largest reserve currency in the world after the U.S. dollar and the euro. This bond is similar to the Yanke
Eurobond
Characteristics:
Issued in international capital markets rather than in one domestic market like foreign bonds.
Not subject to any country's securities laws and not registered with any gov agency a la SEC
Underwritten by international underwriting syndica
History of Eurobond Market
When the first Eurodollar market started in europe in 1957, the Eurobond market also emerged.
1957: $5 million issue by a Belgian oil company
1961: another issue by a portugues oil company
1963: another issue by Autostrade, the italian highway authority
I
Interest Equalization Tax (IET, 1963)
A federal levy on the purchase price on foreign stocks and bonds bought by Americans. The interest equalization tax (IET) was established in 1963 and eliminated in 1974. It was designed to decrease the U.S. balance of payments deficit by discouraging inve
Voluntary Foreign Credit Restraint (VFCR)
...
Foreign Direct Investment Program (FDIP)
...
Roles of Underwriting Syndicate
- Negotiate terms with the issuer
- advice on market timing
- perform due diligence investigation of the issuer
- contact potential syndicate members
- prepare prospectus and bond documents
- keep the book
- supervise publicity
- stabilize the primary mar
Types of Eurobonds
� Floating-rate notes
� Convertible eurobonds
� Exchangeable Eurobonds
� Deal-currency eurobonds
� Eurobonds with warrants
� Commodity-linked eurobonds
� Currency-linked eurobonds
� Zero-coupon eurobonds
� Deferred coupon eurobonds
� Callable Eurobonds
�
Local Currency Eurobonds
Eurobonds have been issued during the past ten years in exotic LDC currencies such as:
- Czech koruna
- Polish Zloty
- Columbian peso
- Brazil real
Major issuers have been supranational financial institutions or large banks using these currencies for curr
Supranational
An international organization, or union, whereby member states transcend national boundaries
or interests to share in the decision-making and vote on issues pertaining to the wider grouping
The European Union and the World Trade Organization are both supr
Bearer form
A security not registered in the issuing corporation's books but that is payable to its bearer (the person possessing it). Securities can be issued in two forms: registered or bearer. Registered form means the issuing firm keeps records of a security's ow
Asset-Backed Eurobonds (example of sears roebuck eurobonds)
Assume that the historical average of default rate of Sears accounts receivable is 5%.
Sears puts up $115 worth of receivables for every $100 of the Eurobonds, thus providing an additional cushion worth three times the historical average default rate.
Sea
The Netherlands Antilles and Withholding Tax
When Us companies wanted to issue Eurobonds to finance US domestic operations, the interest payments by US companies in US to Eurobond investors were subject to 30% US withholding tax until 1984.
In order to avoid paying the withholding tax, US companies
tax-call clause
...
Arbitrage between US and Eurobond Markets
Being in bearer form, Eurobonds provide secrecy compared to US registered bonds. Thus, Eurobond yields are often lower than comparable US bond yields, providing arbitrage opportunities.
In mid 1980s, Exxon issued 1.8billion 30-year zero coupon Eurobonds f
Defeasance
A provision that voids a bond or loan when the borrower sets aside cash or bonds sufficient enough to service the borrower's debt.The borrower sets aside cash to pay off the bonds, therefore the outstanding debt and cash offset each other on the balance s
Origin of Global Bonds
The first Global bond issue was $2.5 billion by the World Bank in 1989.
Until 1989, there were three ways for the World Bank to tap dollar bond markets:
1) $Yankee bonds
2) $Eurobonds
3) $Shogun bonds
What are the main disadvantages for the world bank bon
Global Bonds (Characteristics)
-Negotiated deals rather than bought deals
-Registered bonds
-book-entry forms rather than physical securities
- semi-annual coupons
- registered with SEC
- Listed on nyse and european exchanges
- traded in all time zones
-yield set at a spread over t-bon
ADRs (American Depository Receipt)
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial insti
GDRs (global depository receipts)
1990: the first global depostory receipts were issued by Citibank. the US component of GDRs is structures as Level 1 or rule 144a ADRs.
A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign br
IDRs (international depository receipts)
A negotiable certificate issued by a bank representing ownership of stock of a foreign company held by the bank in trust. The International Depository Receipt (IDR) is known as the American Depository Receipt (ADR) in the United States; ADRs represents st
Foreign portfolio investment
Securities and other financial assets passively held by foreign investors. Foreign portfolio investment (FPI) does not provide the investor with direct ownership of financial assets, and thus no direct management of a company. This type of investment is r
foreign direct investment
An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in e
Risks in project finance
1) commercial and financial
2) political
3) force majeure
Commercial and financial risks in project finance
1. completion risk - the risk that a project will not be brought into operation succesfully or be able to pass its completion test
2. credit analysis risk - The risk of loss of principal or loss of a financial reward stemming from a borrower's failure to
Political risks in project finance
1. transfer risk - the risks associated with the possibility of a currency not being able to be sent out of a country, usually due to central bank restrictions or a national debt rescheduling.
2. expropriation risk - The act of taking of privately owned p
Force majeure risks in project finance
greater force"
1. Act of nature or God
2. Wars, insurrections, strikes, sabotages
Project Financing Techniques (on balance sheet)
1. debt financing
2. equity financing
3. quasi-equity (mezzanine financing) - A category of debt taken on by a company that has some traits of equity, such as having flexible repayment options or being unsecured. Examples of quasi-equity include mezzanine
Project Financing Techniques (off balance sheet)
focus on the cash flows of the project rather than the balance sheet assets of a project sponsor
form of project financing, wherein a private entity receives a concession from the private or public sector to finance, design, construct, and operate a facil
Lease types
1. Operating
2. Financial (capital)
3. Wet - Form of a leasing agreement that provides multiple services to the individual(s) leasing the property. This type of lease typically applies to the airline industry and under this agreement the owner will provid
Project Cash Flows (initial)(8)
Initial cash flows:
Capital costs (-)
After-tax salvage value (+)
The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting to determine depreciation amounts and in the tax system to determ
Project Cash Flows (operational)(3)
Net income after tax (+)
Depreciation and Amortization expenses (+)
Interest expenses* (1-t)(+)
Project Cash Flows (termination)(3)
After-tax salvage value (+)
Recovery of working capital (+)
Clean up costs (-)
Financial IRR
FIRR is calculated from the perspective of the entity making the investment
Financial Internal Rate of Return - discount rate at which NPV is zero, with the discount rate assumed to be the reinvestment rate.
Economic IRR (ERR)
Estimated from the macro perspective for the country's economy.
Required modifications to calculate ERR:
1. Transfer payments
2. Externalities
3. Shadow prices
Economic vs Financial IRR
Transfer payments:
Income taxes (+)
Tariffs (+)
Investment Tax Credits (+)
Subsidies (-)
Externalities:
Pos externalities (+)
Negative '' (-)
Shadow Prices:
Shadow commodity prices
Shadow exchange rate
Shadow wage rates
Trade Financing Methods (Traditional and non-Traditional)
Traditional trade financing methods:
Trade L/C (letter of credit)
-Letters of credit are legal instruments providing a financial guarantee. They assure a beneficiary that payments will be made or nonfinancial obligations performed by a seller or provider.
Traditional Trade Finance Tools (commercial or trade L/C)
Clean vs. documentary L/C
A clean letter of credit allows an applicant to issue drafts which must be paid on demand by the bank, without additional required documentation.
Confirmed (or two-name) L/C
Unconfirmed (or single-name) L/C
Back-to-back L/C
Revoc
Traditional Trade Finance Tools (Standby L/C)
Performance standby L/C
-A performance letter of credit is a document put into use in a situation where your business is buying from a supplier. The performance letter of credit is assurance to the seller that the bank issuing the performance letter of cr
Documentation for trade L/C
Bill of lading (B/L), issued to exporter by common carrier:
Clean vs. foul B/L
-A bill of lading issued by a carrier declaring that the goods have been received in an appropriate condition, without the presence of defects. The product carrier will issue a
Bankers Acceptance (BA)
BA is a bank time draft accepted by a bank.
A short-term debt instrument issued by a firm that is guaranteed by a commercial bank. Banker's acceptances are issued by firms as part of a commercial transaction. These instruments are similar to T-Bills and a
Types of BA
Exporter BA with L/C
Exporter BA without L/C (Refinancing bill)
Importer BA without L/C
Advantages of BA (for banks)
Acceptance commission
No reserve requirement when rediscounting BA
Double the maximum credit limit for a client
Rediscounting at below CD rates
Advantages of BA (for borrowers)
Below prime rate credits, including fees
No compensating balance
Relatively easy to create
Export Factoring
Sale of short-term trade receivables to an export factor. Receivables are generally 3-6 months.
Recourse basis: factor gives back receivables not collectable.
Non-recourse basis: factor assumes the credit risk.
Factoring allows exporter to ship goods on
Forfaiting (medium to long term trade financing)
During the Cold War period, originally developed to facilitate trade between the East and the West by allowing FX reserve-short East bloc countries to import capital goods from the West.
Now, used for trade between industrialized countries and FX-short de
Securitization (from the article)
the process in which certain assets are pooled so that they can be repackaged into interest bearing securities. The interest and principal payments from the assets are passed through to the purchasers of the securities.
Increasing numbers of financial ins
Global Registered Shares (GRS)
ordinary shares but are traded in multiple currencies and a GRS has to link the home country clearing and settlement system with the us system. A GRS is an actual share. Different from an ADR which is a receipt representing shares deposited in a trust.