notes inclass 3

8/20/2019 Notes Inclass 3

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introduction

A debt security is one that promises to make defned payments (could be

payment at maturity) (not necessarily defned amounts) on specifed dates in the

uture. (one cash ow !erocoupon bond (snow ball)" bill" treasury note)

#ebt instruments do not $i%e the holder ownership ri$hts. (ta&" maturity" out o

profts" $oin$ concern" entitled to money in li'uidation security)

he #ebt arket

Australian debt markets can be di%ided into three le%els*

+ash market oney market ,i&edinterest market

-n Australia terminolo$y typically attaches words bills or notes to shortertermsecurities ( year) and bonds to lon$erterm securtiesw. ot uniorm across the

world

+ash market

#eals in %ery shortterm securities impacted by positions taken by the reser%e

bank o Australia (1A)*

includes o%erni$ht interbank market

ypical maturity o 23 hours with am settlement

4ettlements arran$ed throu$h e&chan$e settlement accounts (4)

4 accounts dominated by fnancial institutions and sub6ect to strict ($enerally

li'uidity) conditions (also a public company)

oney arket

#eals in shortterm securities up to 2 months (si!able amount o money min

50"000 dollars)

includes $o%ernment securities" treasury notes

Also bank bills and promissory notes (one transaction to in%estor) (discount

securities $o%ernment and non $o%ernment)

7articipants include pri%ate sector" fnancial intuitions" fnancial in%estors.

,i&ed-nterest arket

#eals in short" medium and lon$term securities*

oten acti%e secondary market or securities (personal or pri%ate loan" term

deposit no secondary market)

$o%ernment securities include state" local and semi$o%ernment or$anisations

lar$e number o participants#esirable 'ualities o securities markets



e$otiability* a desirable characteristic o a fnancial security. -t reers to the

ability to transer ownership rom one party to another (can be issued as bearer

(whoe%er holds the paper can cash it in" no names recorded)/ inscribed stock

(transerred name)) (e%idence trade online" on or o8) (chess system is

benefcial)

li'uidity* $i%en lon$er term securities in f&edinterest market bein$ able to sell

easily at any time adds to attracti%eness o securities. (want to ha%e a market

attracti%eness" buyers sellers" confdence)

9ow risk* %arious acets need to be considered includin$:

deault risk

capital risk: and

ination risk

+ommonwealth ;o%ernment 4ecurities (c$s)

+;4* securities issued by the 1A on behal o the ederal $o%ernment (treasury

notes/bonds)

As at <une 20=" +;4 on issue in Australia totalled >25? billion" up rom a low o

>5@ billion in 200 and more than double the f$ure o >0 billion in 200@

Bolders o +;4

a6or holders are*

1ba

ank

7ri%ate mana$ed unds

Cther holders

reasury notes

treasury notes are a short term discount security (considered riskless D see or

e&ample +A7 ormula) (1,E treasury note)

Fdiscount securitiesG are issued at a price lower than their ace %alue (interestrepresents the di8erence)

traditionally issued at a weekly tender with maturities o 5" = or 2 weeks:

today used by the 1A in li'uidity mana$ement D in multiples o >m ace %alue.

reasury onds

reasury bonds are a lon$ term coupon security 0=0 yeasrs

Fcoupon securitiesG pay a f&ed stream o interest payments (typically hal

yearly) plus a fnal payment (interest rate f&ed o%er term)

issued at occasional tenders with maturities o 55 years and used by the 1Ain li'uidty mana$ement.



treasury bonds are issued on beal o the commonwealth $o%ernment

all c$s are Finscribed stockG

treasury inde&ed bonds are a%ailable (capital %alue ad6usted by ination rate) D

payments /3ly increase with chan$e in capital %alues (not popular) (will chan$e

the coupon payment (maturity %alue chan$e)

Hero coupon bonds (!cb)

A !cb is a bond that pays a sin$le cash payment" comprisin$ both principal and

interest" at matuiry (interest compounded D snowball e8ect) may be appropriate

as a orm o fnancin$ or some pro6ects (commercial property de%elopments

etc.) (can minimise their cash owsa)

1epurchase a$reements (17C4)

defnition* a security is bou$ht or sold with an a$reement to re%erse the

transaction a short time later (principally $o%t. or semi $o%t security)

7urpose* pro%ide a cheap undin$ source

place to park short term surplus cash"

A way to alter a portolio mi&

a means to co%er shortterm li'uidity shortalls)

+redit ratin$ a$encies

Attached to debt securities

defnition* frms paid to rate the creditworthiness o securities issuersseprerate issuer/ issue credit ratin$

purpose* to inorm the pricin$ o securities

e&amples* moodys

1atin$ process*

1atin$ scale D AAA to +++

,itchs website in%estment $rade*

AAA the best 'uality companies" reliable and stable

AA 'uality companies" a hi$her risk than AAA

A* economic situation can a8ect fnance

* medium class companies" which are satisactory at the moment

+redit ratin$ criteria*

4hort term pri%ate instruments

ank accepted bill* a promise to pay issued by a pri%ate borrower but

$uaranteed by a bankcertifcates o deposit* e'ui%alent to a bank bill" where the issuer is a bank



promissory note* a promise to pay that does not ha%e a bank $uarantee.

9on$ term pri%ate instruments

+orporate bonds* a lon$term non$o%ernment f&ed interest security (also

known as FdebenturesG)

-ssuers include corporates" banks and o%erseas entities

F6unk bondsG are corporate bonds with below in%estment $rade credit ratin$s

and hi$her interest rates

-nterest rate securities

oatin$ rate notes (ad6usted in line with benchmark D e$ @0 day A rate)

con%eritble note (typically to e'uity specifed date/ con%ersion rate)

4ecuritisation

4ecuritised bonds* a packa$in$ o small income $eneratin$ assets into lar$e

f&ed interest (assetbacked) security. -99-IJ-#. rin$ those cash ows to$ether.

4ellin$ o8 the asset" which $i%es cash ows)

&ample* housin$ loans were popular up to ;,+ dropped by K50L ollowin$

;,+.

nhancement* means takin$ on the risk o a seucirity to its credit ratin$

better risk mana$ement

di%ersiy undin$ base

balance sheet mana$ement assets %s liabilities

product di%ersifcation

notes inclass 3

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