35 years: Debt capital markets
Tim provides a detailed overview of the debt capital markets - their uses, users, salient features and how the markets are regulated.
Tim provides a detailed overview of the debt capital markets - their uses, users, salient features and how the markets are regulated.
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26 mins 48 secs
Debt capital markets refers to the market for debt issued by sovereign governments, government and supranational agencies, financial institutions and companies in the form of tradable securities, or bonds. Bonds are typically sold to a wide variety of investors and have an active trading, or secondary market. Bonds vary in the terms they offer but also in the riskiness of the issuers.
Key learning objectives:
Identify the principal users of the bond market
Understand how the bond market is segmented by type and category of investor
Outline the steps involved in issuing a bond and which parties are involved
Learn the rules that exist around information disclosure and why
Learn the features that investors look for in bonds
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There are three specialist areas of the bond market:
A broad array of investors provide investment capital.
Debt is priced by reference to the so-called ‘risk-free’ rate, the rate at which debt of prime governments trades. Investors evaluate risk by reference to the best credits and prevailing interest rates in a given market. Timing and market sentiment will also govern pricing.
There are four broad parameters investors look at when deciding if and at what price they will invest:
Taking these parameters into account, investors look to achieve a certain yield i.e. the all-in return achievable from investing in a bond. To calculate the yield, investors need to know:
Issuers are bound by the terms of their bonds and have legal obligations around communication and transparency. Regulators have set rules to ensure honest and efficient performance of markets.
There is a strict line between the ‘private side’ of the market (where DCM people work) and the ‘public side’, where traders and salespeople work. The line between them is called the ‘Chinese Wall’ and is designed to be an information barrier. Private side people will know a lot about the issuers’ plans and market aspirations, information which could be unscrupulously used by people to conduct insider trading or manipulate the market to their advantage.
Any private information which might lead to the movement in the prices of securities is known as ‘Price Sensitive information’ (PSI). There are strict controls in place to ensure PSI remains secret and kept away from the public side of markets. This system is overseen and enforced within each investment bank’s compliance staff.
If information is likely to move markets, it must be kept secret or, where required, made available to all investors at the same time. The same applies to the process of book building and communicating with investors in primary and secondary markets. Any shared information must be public and accurate.
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