M3: Fixed-Income Issuance and Trading

What are the three main dimensions used to classify fixed-income markets?

Issuer type, credit quality, and time to maturity.

What are the main fixed-income issuer sectors?

Sovereign government; government-related; corporate; securitized.

What are examples of government-related issuers?

Government agencies, supranationals, and local governments.

What are examples of securitized fixed-income instruments?

Asset-backed securities (ABS) and mortgage-backed securities (MBS).

How is fixed-income credit quality broadly classified?

Investment grade (IG) versus high yield (HY).

What is the investment-grade floor for S&P/Fitch?

BBB−.

What is the investment-grade floor for Moody's?

Baa3.

What is the highest high-yield rating for S&P/Fitch?

BB+.

What is the highest high-yield rating for Moody's?

Ba1.

What is the key IG/HY boundary to memorize?

BBB−/Baa3 and above = investment grade; BB+/Ba1 and below = high yield.

What is a fallen angel?

An issuer or bond that was investment grade but has been downgraded to high yield.

Why can a fallen-angel downgrade cause significant selling?

Investment-grade mandated investors may be required to sell securities that fall below investment grade.

What is a debut issuer?

A first-time issuer of fixed-income securities.

How are fixed-income instruments classified by maturity?

Short term = under 1 year; intermediate term = 1–10 years; long term = over 10 years.

Why can one fixed-income issuer have many securities outstanding?

It can issue debt with different maturities, currencies, seniorities, and structures.

What is commercial paper (CP)?

A short-term, unsecured promissory note issued by corporations, primarily to finance working capital.

What does commercial paper commonly finance?

Inventory, receivables, payroll, and other short-term operating needs.

Why is commercial paper mainly available to strong investment-grade issuers?

It is short-term and unsecured, so investors require strong credit quality.

How do high-yield issuers typically finance working-capital needs instead of unsecured CP?

Secured working-capital facilities.

How does investment-grade issuer financing access generally differ from high-yield issuer access?

IG issuers have broad access across short, intermediate, and long maturities, often unsecured; HY issuers have narrower access and rely more on secured intermediate-term debt.

What debt profile commonly signals a high-yield issuer?

Secured, intermediate-term debt with limited access to unsecured commercial paper and long-term bond markets.

What debt profile commonly signals an investment-grade issuer?

Broad access to short-, intermediate-, and long-term financing, often on an unsecured basis.

What is a credit facility?

A borrowing arrangement with banks that provides the issuer access to funds, such as a revolving credit facility.

What is a syndicate in the context of credit facilities or bond issuance?

A group of banks or underwriters jointly participating in financing or distributing an issue.

Which investors typically hold short-term, high-quality fixed-income securities?

Money market funds and corporate treasurers.

Why do money market funds and corporate treasurers prefer short-term high-quality debt?

It serves as a relatively liquid cash alternative.

Which investors are important buyers of long-term investment-grade bonds?

Pension funds and insurance companies.

Why do pension funds and insurance companies favor long-term bonds?

Their long-dated liabilities can be matched with long-dated fixed-income assets.

Which investors are common participants in high-yield and distressed debt?

Hedge funds and distressed-debt funds.

Why do investors buy high-yield debt?

To seek higher expected returns in exchange for greater credit/default risk.

What are credit ratings?

Letter-grade assessments of credit quality reflecting probability of default and expected loss given default.

Which major agencies provide credit ratings?

S&P, Moody's, and Fitch.

What is the highest rating from S&P/Fitch?

AAA.

What is the highest rating from Moody's?

Aaa.

What roles do developed-market sovereign bonds play beyond government financing?

They may serve as reserve assets for foreign central banks and instruments for domestic monetary policy.

Why does emerging-market debt generally offer higher expected returns than developed-market sovereign debt?

Investors require compensation for greater credit and currency risks.

What is a fixed-income index?

An index that tracks the returns of bonds meeting specified inclusion criteria.

What are the three main uses of fixed-income indexes?

Evaluating market performance, benchmarking investment managers, and supporting passive/indexed investment strategies.

Why should a bond fund's benchmark match its investment mandate?

A benchmark should have similar maturity, credit, sector, and other characteristics to make performance comparisons meaningful.

Why do fixed-income indexes generally contain more securities than equity indexes?

One issuer can have many qualifying bonds outstanding, while an equity issuer typically has only one common stock.

Why do bond indexes have higher turnover than equity indexes?

Bonds mature and leave the index while issuers continually issue new bonds that enter the index.

How frequently are fixed-income indexes typically rebalanced?

Monthly, typically at month-end.

How are broad fixed-income indexes commonly weighted?

By the market value of debt outstanding.

How are equity indexes commonly weighted?

By issuer market capitalization.

Why is full replication of a broad bond index often impractical?

Bond indexes may contain thousands of securities and experience substantial turnover.

How do passive bond funds commonly replicate large bond indexes?

Representative sampling rather than holding every constituent.

What happens when a bond falls below an index's minimum remaining-maturity requirement?

It is removed from the index at rebalancing.

What happens when a new qualifying bond is issued?

It may be added to the index at the next rebalancing.

How are intra-month coupon and principal payments treated by a fixed-income index?

They contribute to the month's return and are reinvested into the index at the next rebalancing.

What is composition drift in a fixed-income index?

The index's characteristics change over time as issuance patterns and credit quality change.

Why can broad bond indexes develop large government weights?

They are weighted by debt outstanding, and sovereign governments often issue very large amounts of debt.

What is an aggregate fixed-income index?

A broad index covering multiple sectors and potentially multiple maturities, currencies, or geographies.

What is a narrow fixed-income index?

An index focused on characteristics such as sector, credit quality, maturity, geography, or ESG criteria.

What type of securities does the Bloomberg Global Aggregate generally include?

Broad global investment-grade fixed-income securities; high-yield and unrated securities are excluded.

What happens to an index bond downgraded below the required investment-grade threshold?

It becomes ineligible and is generally removed at the next rebalancing.

What is a primary fixed-income market?

The market where issuers sell newly issued bonds to investors to raise capital.

What is a secondary fixed-income market?

The market where existing bonds trade between investors.

How does primary bond issuance frequency compare with equity issuance?

Bond issuers may issue frequently and continuously; equity issuance is generally much less frequent.

What is an underwritten bond offering?

An offering in which the intermediary guarantees the sale at an agreed price by buying the bonds and reselling them to investors.

Who bears inventory risk in an underwritten offering?

The underwriter.

What is the key memory rule for an underwritten offering?

Underwritten = guaranteed sale + underwriter bears inventory risk.

What is a best-efforts offering?

An intermediary attempts to sell the bonds as a broker but does not guarantee that the entire issue will be sold.

Who bears unsold-issue risk in a best-efforts offering?

The issuer; the intermediary does not take inventory risk.

What is the key memory rule for a best-efforts offering?

Best efforts = no sale guarantee + intermediary acts as broker.

Which issuers commonly use underwritten bond offerings?

Investment-grade corporates and frequent issuers.

Which issuers are more likely to use best-efforts offerings?

High-yield, special-purpose, or less well-known issuers.

What is a fixed-income private placement?

A bond issue sold to a small group of qualified investors, usually without public registration.

What is shelf registration?

An issuer registers a broad offering in advance and later issues individual tranches when market conditions are attractive.

Which issuers commonly benefit from shelf registration?

Frequent issuers.

What primary issuance mechanism is commonly used by sovereign governments?

Public auction.

What is a bond reopening?

An issuer increases the outstanding amount of an existing bond, potentially at a price significantly different from par.

How are frequent investment-grade corporate bonds typically priced at issuance?

At or near par.

Where does most secondary fixed-income trading occur?

Over-the-counter (OTC) through quote-driven dealer networks.

Where does most listed-equity secondary trading occur?

On organized electronic exchanges.

What is the key secondary-market contrast between bonds and equities?

Bonds = mostly OTC/quote-driven; listed equities = mostly exchange-traded.

What is the bid-offer spread?

The difference between the price at which a dealer buys a bond (bid) and sells it (offer).

What does a narrower bid-offer spread generally indicate?

Greater liquidity.

What does a wider bid-offer spread generally indicate?

Lower liquidity.

What are on-the-run sovereign bonds?

The most recently issued benchmark sovereign bonds of a particular maturity.

How liquid are on-the-run developed-market sovereign bonds generally?

Highly liquid, typically with very narrow bid-offer spreads.

What happens to sovereign bond liquidity as a bond becomes seasoned or off-the-run?

Liquidity generally falls and bid-offer spreads widen.

Why can some corporate bonds trade infrequently?

An issuer may have many separate issues and dealers may hold limited inventory in individual seasoned bonds.

How may prices be estimated for bonds that rarely trade?

Using comparable securities through matrix pricing.

What is distressed debt?

Debt of an issuer believed to be close to or already in bankruptcy.

Why does distressed debt typically trade well below par?

Investors do not expect to receive all promised future cash flows.

Who are common buyers of distressed debt?

Hedge funds and other opportunistic/distressed-debt investors.

Why can distressed bonds continue trading after the issuer's equity stops trading?

Equity may be delisted for failing exchange requirements, while debt can continue trading until liquidation or restructuring.

What is the exam rule for trading during financial distress?

Equity may be delisted first; bonds can continue trading until liquidation or restructuring.

How do the number of instruments per issuer differ between fixed-income and equity markets?

Fixed-income issuers may have dozens or hundreds of bonds; equity issuers typically have one common stock.

How does index turnover differ between fixed-income and equity indexes?

Fixed-income indexes generally have much higher turnover.

How does index weighting typically differ between fixed-income and equity indexes?

Fixed income = market value of debt outstanding; equity = market capitalization.

What are three major fixed-income versus equity exam contrasts?

Bonds mostly trade OTC while equities trade on exchanges; bond indexes have more constituents and turnover; distressed bonds may continue trading after equity is delisted.