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Banking Essentials - Part I

This pathway will walk us through the basics of banks, starting with some of the different types and their main functions, then starting to look at the regulation faced by the banks, both before and after the Global Financial Crisis.

Greenwashing

Greenwashing is the act of distributing false information about something being more environmentally friendly than it actually is.

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Tackling the Cost of Living Crisis

In this video, Max discusses the cost-of-living crisis currently enveloping the UK. He examines its impact on households as well as the overall economy.

CSR and Sustainability in Financial Services

In the first video of this two-part video series, Elisa introduces us to sustainability. She begins by looking at the difference between sustainability and corporate social responsibility, two terms that can be easily confused.

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The Role of Credit Markets

The Role of Credit Markets

Lindsey Matthews

30 years: Risk management & derivatives trading

In the previous video, Lindsey Matthews introduced Financial Markets. In this video he explains how debt markets work. He covers how companies and governments use these markets and also covers the different ways in which they can raise debt.

In the previous video, Lindsey Matthews introduced Financial Markets. In this video he explains how debt markets work. He covers how companies and governments use these markets and also covers the different ways in which they can raise debt.

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The Role of Credit Markets

6 mins 21 secs

Overview

One of the routes for larger companies and governments to borrow is through the debt capital markets. The markets provide the mechanics for the issuance and trading of debt. Rather than borrowing money from a bank, a company might issue bonds to raise finance and rather than investing money with a bank, investors could buy the bonds that are being issued.

Key learning objectives:

  • Understand the purpose of the debt capital markets

  • Outline some of the types of debt that is issued

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Summary

What is the purpose of the debt capital markets and how do they work?

Companies and governments use the debt markets to raise finance. As companies get larger, financing typically moves from banking finance (borrowing from banks) to bond financing, i.e. issuing bonds in the debt capital markets. 

Bonds are securities representing debt. The issuer of bonds receives money from the original purchasers of the bonds at the point when they are issued and this is done in the primary market, the market for initial issuances. Issuers will work for investment banks debt capital markets teams to make this happen. 

The market for buying and selling bonds is known as the secondary market, and prices of bonds will change, reflecting both the general market for the instruments and the specifics of the issuer. 

Bond will pay interest (a coupon), which is paid periodically to the holders, as well as the redemption amount, however as the bond may have been traded in the secondary market, this may not go to the original purchasers of the bond. 

What are government bonds?

Governments are some of the biggest issuers of bonds. The US issues Treasury Bonds, the UK issues Gilts and Germany issues Bunds, just to name a few. 

Many of the higher rated governments issue bonds directly to buyers through auctions, which then trade in the secondary bond markets. 

The prices of these large government bond issues are often used as benchmarks against which other bond prices are compared, this is due to the fact that highly rated governments are often regarded as having little or no credit risk. 

What are credit bonds? 

Bonds issued by other governments, by financial institutions, by corporates have some credit risk. The level of perceived credit risk is often used to divide bonds into asset classes or sectors.

One of the most significant such distinctions is between higher rated bonds which are known as “Investment Grade” (BBB rated and above) and those that are lower rated or sub-investment grade (rated lower than BBB). Another distinction that is often made is ‘developed market’ vs ‘emerging market’ debt.  

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Lindsey Matthews

Lindsey Matthews

Lindsey runs Perfordiant, an investment risk and performance consulting firm. He has worked in financial markets since 1992. Lindsey became an MD in fixed income and equities, ran a Risk function, and was on the management team of an Asset Management fintech business. Lindsey is now a Visiting Fellow at the Henley Business School, and resides on the board of CFA UK.

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