Fixed Income I
Reading 43. Fixed-Income Markets: Issuance, Trading, and Funding
Learning Outcome Statements
a. describe classifications of global fixed-income markets;
b. describe the use of interbank offered rates as reference rates in floating-rate debt;
CFA Curriculum, 2020, Volume 5
Subject 1. Classification of Fixed-Income Markets
Type of Issuer
Three major market sectors are the government and government-related sector, the corporate sector, and the structured finance sector. In most countries, the largest issuers of bonds are national and local governments as well as financial institutions.
A bond can be considered investment-grade or high-yield based on the issuer's creditworthiness (as judged by credit ratings agencies).
Money market bonds have original maturities ranging from overnight to one year. Capital market bonds have original maturities longer than one year.
The majority of bonds are denominated in either Euros or U.S. dollars.
Type of Coupon
Some bonds pay a fixed rate of interest while others pay a floating rate of interest. The coupon rate of a floater is expressed as a reference rate, such as LIBOR, plus a spread. Different reference rates are used, depending on where a bond is issued and its currency denomination.
Interbank offered rates are sets of rates that reflect the rates at which banks believe they could borrow unsecured funds from other banks in the interbank market for different currencies and maturities. These rates may be used as reference rates for floating-rate bonds, mortgages, and derivatives.
There are domestic, foreign and Eurobond markets. Investors also make a distinction between the developed and emerging bond markets. Emerging market bonds usually exhibit higher risk than developed markets bonds.
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Domestic Bond - Issuer from domestic country/issue trades in the domestic country denominated in the domestic currency.
Foreign Bond - Issue trades in the domestic country and denominated in the domestic currency. But, it is issued by a foreign entity.
Eurobond - issued in currency that DIFFERS from the home country in which it trades