Lecture 5

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Please note:
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For copyright reasons it may not be possible to reproduce all images.

TR
E APTLHACCLEY DOEF BUUSSEIFNUELS S
International Financial
Markets and Banking
L ESACRHNOI N
OGL
Juliane Thamm
SW 3.07, Ext.: 3889, juliane.thamm@strath.ac.uk

Office hours: see myplace for details and/or email for an appointment
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S T R AT H C LY D E B U S I N E S S S C H O O L
Lecture 5
Debt and Money Markets
© Juliane Thamm – University of Strathclyde

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Debt Markets

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Debt Markets
A bond is like a loan, where the borrower is committed to pay

interest (coupons) and to return the principal at a set date in
the future
Unlike a traditional bank loan, a bond is tradable on the

secondary market
We will look at bonds issued by governments and bonds

issued by companies

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Bonds
Long-term contract in which the bond holder lends money to

a company, government or some other organisation
The company or government, etc. promises to make
predetermined payments (usually regular) in the future which
may consist of interest and a capital sum at the end of the
bond’s life
More than $90,000,000,000,000 ($90 trillion) in issue
The time to maturity for bonds is generally between 5 and 30
years.

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Bonds and equity compared

With a bond you are promised a return

Less risk e.g. the right to receive the annual interest before
the equity holders receive any dividend, rights to seize
company assets
Bondholders do not (usually) share in the increase in value
created by an extraordinarily successful business
Absence of any voting power over the management of the
company
Referred to collectively as fixed-interest securities.
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Image:
https://www.imf.org/wp-content/uploads/2021/12/FINAL-
eng-global-debt-blog-dec-8-chart-127.jpg Also check out the
Economist’s Global Debt
Clock
https://www.economist.com/c
ontent/global_debt_clock
Images on next slide

Left: https://www.visualcapitalist.com/wp-
content/uploads/2022/02/GDPDebt2021_1200px_Mobile_Finalized.jpg
Right: https://www.imf.org/wp-content/uploads/2021/12/eng-global-debt-blog-dec-8-chart-2-370-
1.png

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Government bond markets

Sovereign bond markets

Governments are aware of the need to maintain a high
reputation for paying their debts on time
They are able to print more money or to raise taxes, to
ensure they have the means to pay (at least in theory).

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Government Bonds
Gilts in the UK, or Treasury bonds in the US
The government seeks to meet its borrowing requirements – e.g. to fund

infrastructure investment – by selling bonds to investors
Gilts typically have maturities from 1 year to 30 years. The money

market (next topic) deals with borrowing less than 1 year.
Government bonds are usually regarded as being free from credit risk.
This is because governments have the power of taxation.

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Distribution of gilt holdings

(£ millions) at end 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1

Local Government 511 230 155 201 414 355
Public Corporations 496 496 496 496 496 496
Monetary Financial Institutions* 640,311 615,372 607,030 648,672 900,464 918,692
Insurance Companies and
Pension funds 544,699 597,098 642,767 697,984 666,634 673,089
Other Financial Institutions 134,483 171,111 185,657 152,750 174,979 128,860
Private Non-Financial companies 1,575 1,844 2,729 953 725 726
Households 2,711 3,882 3,835 3,845 4,886 4,647
Overseas Holdings (Rest of World) 520,597 535,995 556,491 648,868 666,346 716,688
Total 1,927,525 1,930,120 2,002,350 2,157,340 2,415,238 2,443,819
* of which Bank of England holds 481,104 462,586 464,314 513,738 784,092 804,496
Source: https://www.dmo.gov.uk/data/gilt-market/

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UK gilts (gilt-edged securities)

You can lose money buying and selling gilts from year to year (or month
to month) in the secondary market before they mature
Oct. 2015, the total amount of gilts in issue: £1,454.69 billion nominal
Nominal (face or par or maturity) value of £100
usually pay a coupon (sometimes called the dividend)
for example: ‘Treasury 4.5pc ’42’ pays out £4.50 each year for every
£100 nominal, in the year 2042 the nominal value of £100 is paid,
coupons are paid twice yearly

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Gilt Auctions
Since 1998 the Debt Management Office (DMO*) has been responsible for gilt
issues.
Its objective is “to minimise over the long term the cost of meeting the
government’s financing needs, taking into account risk, while ensuring that the
debt management policy is consistent with the objectives of monetary policy.”
Most gilts are sold by auction, typically £300m - £3bn.

Bond dealers and large investors can make competitive bids (£1m+) and, if
successful, pay the price they bid. Individuals can make non-competitive bids,
and pay the average price from the auction.
* http://www.dmo.gov.uk

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Gilt Secondary Market

‘Big Bang’ affected the gilt market as well as the equity market.
Gilt Edged Market Makers (GEMMs) act in the dual role of brokers and market
makers.
GEMMs are obliged to quote two-way prices for a wide range of gilts and are
expected to bid in the auctions. In return they get special access to the DMO.
The DMO also acts in the secondary market, bidding for existing gilt stock and
‘tapping’ existing issues.
Some gilts trade as STRIPs. This is where the bond is split and the interest
coupons are traded separately from the principal payment.

X UK Yield Curve 16 Oct. 2020
Data source:
http://markets.ft.com/research/Mark
ets/Bonds
UK Yield Curve 15 Oct. 2022

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Yield Curve / Term Structure

Yields typically vary by time to maturity and various theories exist to explain the term
structure of interest rates
Expectations Theory
The bond market discounts future short term interest rates.
If the yield curve slopes up this implies short rates will be higher in future
Preferred Habitat
Yields are determined by the balance between supply (issuers) and demand (investors) at
different maturities
Investors require a risk premium for lending for a longer term
Market Segmentation
Different types of investors operate in short term bond markets compared to longer term
markets.
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Ten Year Government Bond Yields

Yield Yield Yield Yield Yield Yield Yield Yield Yield
Country
24 Oct. 2014 8 Oct. 2015 29 Sept. 2016 5 Oct. 2017 4 Oct. 2018 11 Oct. 2019 16 Oct.2020 10 Oct. 2021 15 Oct. 2022
Australia 3.31% 2.71% 2.04% 2.79% 2.72% 1.03% 0.73% 1.67% 4.06%
Austria 1.12% 0.88% 0.11% 0.62% 0.75% -0.22% -0.45% 0.07% 3.06%
Belgium 1.23% 0.92% 0.14% 0.72% 0.89% -0.16% -0.39% 0.16% 2.99%
Denmark 1.14% 0.90% 0.02% 0.52% 0.47% -0.46% -0.51% 0.13% 2.74%
Finland 1.03% 0.85% 0.03% 0.62% 0.78% -0.21% -0.43% 0.01% 3.03%
France 1.30% 0.89% 0.13% 0.74% 0.87% -0.19% -0.35% 0.19% 2.93%
Germany 0.89% 0.60% -0.11% 0.45% 0.53% -0.47% -0.63% -0.15% 2.34%
Greece 7.36% 7.83% 8.25% 5.58% 4.51% 1.46% 0.79% 0.90% 4.96%
Italy 2.52% 1.19% 1.21% 2.24% 3.36% 1.05% 0.68% 0.88% 2.90%
Japan 0.47% 0.33% -0.08% 0.04% 0.16% -0.18% 0.03% 0.09% 0.25%
Netherlands 1.05% 0.78% 0.01% 0.57% 0.63% -0.33% -0.52% -0.02% 2.68%
New Zealand 4.02% 3.46% 2.36% 2.97% 2.65% 1.18% 0.57% 2.07% 4.49%
Portugal 3.27% 2.37% 3.32% 2.41% 1.90% 0.19% 0.13% 0.36% 3.44%
Spain 2.19% 1.83% 0.93% 1.75% 1.57% 0.22% 0.13% 0.50% 3.55%
Sweden 1.27% 0.67% 0.19% 0.92% 0.69% -0.22% -0.10% 0.38% 2.15%
Switzerland 0.45% -0.18% -0.53% -0.02% 0.06% -0.68% -0.56% -0.09% 1.39%
UK 2.23% 1.83% 0.73% 1.36% 1.66% 0.64% 0.17% 1.16% 4.37%
US 2.26% 2.09% 1.59% 2.32% 3.21% 1.68% 0.73% 1.31% 4.02%
How do you explain yield difference across national markets?

Source: http://markets.ft.com/RESEARCH/Markets/Government-Bond-Spreads
Image on previous slide is a screenshot from: https://www.theguardian.com/business/2022/oct/14/liz-truss-fails-to-calm-
X markets-sterling-ftse-bonds-kwasi-kwarteng
US Treasury notes and bonds

Coupon payable every six months

Maturity of two, three, five, seven or ten years
Face value $1,000
Treasury bonds are auctioned quarterly
Treasury inflation-protected securities (TIPS) – similar to
index-linked gilts

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Other Sovereigns
French bonds
OATS (Obligations assimilables du Trésor), (7–50-year bonds, mostly fixed rate)
BTANS (Bons du Trésor à intérèts annuels), (2–5-year bonds with a fixed rate of interest)
German bonds
Two-year Federal Treasury Notes – Bundesschatzanweisungen (Schätze)
Five-year Federal Notes – Bundesobligationen (Bobls)
10- and 30-year Federal Bonds – Bundesanleihen (Bunds)
Japanese bonds
Japanese government bonds (JGBs) maturity of 2, 5, 10 and 20 years
Chinese bonds
2009 it issued the first bonds denominated in the Chinese renminbi currency.

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Local authority/municipal bonds

Issued by governments at a subnational level; not common in the UK
•US municipal bonds are usually tax exempt

•Japan
•German Länder (federal states)
•Quasi-state organisations

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Corporate Bonds
Corporate bonds come in a variety of forms:

Secured bonds (debentures / mortgage bonds)
Unsecured loan stock
Convertible bonds (convertible to equity shares)
The key difference between corporate bonds and those issued by government is in the
probability of default
Credit rating agencies exist to provide investors with guidance on the probability an
issuer will default
Generally, you would expect corporate bonds to yield more than government bonds
and this ‘yield spread’ will be higher the lower the bond’s credit rating
Image on next slide is a screenshot from

https://www.ft.com/content/d72dbda9-0164-4e89-8898-b162538ce605
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Corporate bonds
Many corporate bonds are listed on the London Stock Exchange and
other exchanges in Europe, Asia or the Americas
Majority of trading occurs in the OTC market
Generally very thin secondary markets
Minimum trade size is occasionally £1,000, more often £50,000.
London Stock Exchange opened a secondary market trading lots are
just £100 or £1,000.*
* see: https://www.londonstockexchange.com/traders-and-brokers/security-types/retail-bonds/private-investor-guide.pdf

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Bond Indenture
The contract between a bond issuer and the investor is called the ‘indenture’ – it will
contain a range of provisions designed to protect the interests of investors
Subordination of further debt

Prevents the issuer issuing any new debt which ranks above the existing debt in terms
of priority (“me first”)
Dividend restrictions
Limit the extent to which the issuer can pay dividends to equity investors (e.g. to a
certain % of profits)
Collateral
Bond holders take a security / charge on some of the assets of the issuer (similar to a
mortgage)

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Bond Indenture (cont.)

Call Option
Some bonds may be “called” (i.e. repurchased) by the issuer. The issuer is most likely
to do this if interest rates have fallen and it can refinance at a lower rate
Sinking Fund
This commits the issuer to buy back a certain proportion of the fund each year, e.g. 5%
of the issue. This is designed to ensure the capital is paid back
Convertibility
Some bonds are issued as “convertibles”. This means at some point in the future the
bond can be exchanged for a set amount of common shares. This is a benefit to the
bond holder if the share price has risen. There is usually no need to convert if the
shares are worth less than the bond

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Infinite variation
Straight, plain vanilla or bullet bonds

Floating rate or variable-rate bonds
Interest rates linked to the rate of inflation
Interest rates paid or the principal payments to a wide variety of
economic events
For example:
Sampdoria, the Italian football club, issued a €3.5 million bond
that paid a higher rate of return if the club won promotion to the
‘Serie A’ division, 2.5 per cent if it stayed in Serie B, 7 per cent if it
moved to Serie A and if the club rose to the top four in Serie A the
coupon would rise to 14 per cent.

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Credit rating
Likelihood of payments of interest and/or capital not being

paid (default) in some cases on the extent to which the lender is
protected in the event of a default (the recoverability of debt)
Investment grade to High-yield (or junk) bonds
Quantitative and qualitative factors, e.g. competitive position of the
company, quality of management and vulnerability to the economic cycle
The same company can issue bonds with different ratings

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Credit rating systems


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Credit rating systems (cont.)

Bond Credit Ratings
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S&P Moody’s Description Indicative Spread

Rating Rating
AAA Aaa Highest rating. Very creditworthy. 43bp
AA Aa Strong ability to repay 73bp
A A Strong, but vulnerable to change in 99bp
circumstances
BBB Baa Credit quality is adequate, but 166bp
vulnerable to circumstances
BB Ba Faces adverse business conditions 299bp
B B Vulnerable to adverse business 404bp
conditions
CCC Caa Requires favourable conditions to 723bp
meet its obligations
D - Defaulted -

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Bond default rates


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Other forms of bonds

Convertible bonds (or convertible loan stocks) carry a rate of interest,

also give the holder the right to exchange the bonds at some stage in
the future into ordinary shares according to some prearranged formula
Usually the conversion price is 10–30 per cent greater than the share
price at the date of the bond issuance
Strips/strip bonds are broken down into their individual cash

flows,becoming tradeable zero coupon instruments
Separate trading of registered interest and principal of securities; tax

advantages in taking a capital gain rather than interest income

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Mortgage Bonds
This is a form of securitisation and is most common in the US
A bank makes a mortgage loan to a customer; it then ‘packages’ that loan together with
other loans into a bond issue to be sold to investors
The bondholders become the beneficial owners of the mortgage, with the right to receive
the interest and principal repayments, however, they also suffer if there are any defaults
Mortgage holders typically have the right to pay off their loans early and this can create
problems for bondholders; early repayments are “passed through” to the bondholders,
this is most likely to occur when rates have fallen, which is precisely the time when you
do not want your capital returned
Other types of loan can be securitised, e.g. credit card debt

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Recap: Securitisation
Loan
BANK BORROWER
Interest
Capital Interest
SPV
Interest
Capital
INVESTOR Note: SPV is Special

Purpose Vehicle

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Securitisation
Repackaged debt
Replacement of long-term assets with cash (improving liquidity and
financial gearing)
Allow a profit on the difference between the interest on the mortgages
and the interest on the bonds
Asset-backed securities (ABS)
Special purpose vehicle (SPV) or special purpose entity (SPE)
Asset-backed securitisation involves the pooling and repackaging of
relatively small, homogeneous and illiquid financial assets into liquid
securities

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Financial Innovation
Investment banks are constantly looking to create new debt securities that
meet the needs of investors
A fairly recent invention is the collateralised debt obligation (CDO)

In essence this involves creating a portfolio of corporate bonds and using it to
back an issue of new securities
The new CDO securities are issued in tranches, with each tranche having
different risk/return tradeoffs; one tranche may be constructed to have a AA
rating, while the others have lower credit ratings
The tranche with the lowest rating is effectively “equity” and may be retained
by the CDO manager. If they have done a good job picking bonds for the
portfolio, the equity tranche will be valuable. If not, it may be worth nothing.
CDOs
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AA-rated
CDO = create
Tranche
a portfolio
of bonds with A-rated
various Tranche
credit ratings
Equity
A, BBB, BB
Tranche

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Foreign bonds
A bond denominated in the currency of the country where it is issued

when the issuer is a non-resident
examples:
Samurai bonds, Yankee bonds (US), Bulldog bonds (UK), Rembrandt
bonds (the Netherlands), Matador bonds (Spain), Panda bonds (China),
Kangaroo bonds (Australia) and Maple bonds (Canada)
Regulated by the domestic authority of the country

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Eurobonds (international bonds)

Bonds sold outside the jurisdiction of the country of the currency in which the
bond is denominated
Medium- to long-term instruments with standard maturities of three, five, seven

and ten years, but there are long maturities of 15–30 years
Not subject to the rules and regulations which are imposed on foreign bonds,
not usually subject to an interest-withholding tax
Bearer bonds
International Capital Market Association (ICMA) - http://www.icmagroup.org/

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Advantages and drawbacks of Eurobonds as a source of finance for companies
Source: Arnold (2012, p.256, exhibit 6.19)

access via our library's ebook collection:
Modern Financial Markets & Institutions
https://www.dawsonera.com/readonline/97
80273778028/startPage/63

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Green Bonds
Green Bonds are any type of bond instrument where the proceeds will be
exclusively applied to finance or re-finance, in part or in full, new and/or
existing eligible Green Projects and which are aligned with the four core
components of the Green Bond Principles (GBP).
The GBP are voluntary process guidelines that recommend transparency and
disclosure and promote integrity in the development of the Green Bond market
by clarifying the approach for issuance of a Green Bond.
For more information see the International Capital Market Association (ICMA) webpage: https://www.icmagroup.org/green-social-and-
sustainability-bonds/green-bond-principles-gbp/

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Image on this slide:

https://www.worldbank.org/content/dam/infographics/780xany/2019/mar/10yearchart.jpg
Source:
World Bank (2019)
Images on next two slides:

https://www.climatebonds.net/files/images/Green%20Bond%20Leader%20Map.PNG
https://assets.bbhub.io/professional/sites/24/BNEF-Figure-1-Annual-sustainable-debt-
issuance-2013-2021.png

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Money Markets

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Money Markets
Money markets deal with short term borrowing and investing requirements
Maturities are typically less than 1 year
A variety of different money market instruments exist, with the key distinction
being who issues the claim
Government
Bank
Company
‘Wholesale market’ rather than a ‘retail market’

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The Interbank Market

The Interbank market is where banks lend to each other
Banks can deposit excess funds, e.g. overnight, for interest, or borrow to meet any
cash shortfall
The London Interbank Offer Rate (LIBOR) was the key interest rate quoted in the
market for a range of currencies and maturities; it will no longer be used from 2021
replaced in the UK by Sterling Overnight Index Average (SONIA) and quoted for
Pound Sterling
Banks also issue Certificates of Deposit (CDs)

These certify that a deposit (from £50,000 to £500,000 in the UK, or $100,000 to
$1million in the US ) has been made with the bank and state when it is repayable
The holder of a CD can trade it in the secondary market – he does not have to redeem
it with the bank

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to address the issues around the old way of determining the benchmark interest rate, alternatives
to LIBOR are being introduced
UK: Sterling Overnight Index Average (SONIA)

- a measure of the rate at which interest is paid on sterling short-term wholesale funds in
circumstances where credit, liquidity and other risks are minimal; calculated as the trimmed
mean of interest rates paid on eligible sterling denominated deposit transactions; rate
administered by the Bank of England and available in current format since 23 April 2018
https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/sonia-key-features-and-
policies.pdf?la=en&hash=A11D3AE9E5A070702AE4F777A70C258E871E49B7
USA: Secured Overnight Financing Rate (SOFR)

- a broad measure of the cost of borrowing cash overnight collateralised by Treasury
securities; calculated as a volume-weighted median of transaction-level tri-party repo data,
unlike the old LIBOR, this rate is based on actual transactions, 2 April 2018 first day of
publication https://apps.newyorkfed.org/markets/autorates/sofr#Chart12
Image on next slide: Table 1 from p. 35 in Schrimpf, A., and V. Sushko (2019) “Beyond LIBOR: a primer on the new benchmark rates”, BIS Quarterly
Review , March, pp. 29-52. Available at: https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf
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Eurocurrency
Currency is deposited and lent outside the jurisdiction of the country that
issued the currency, e.g. Eurocurrency, Eurodollar, Euroyen,
Euroswissfrancs
‘Eurocurrency’ is short-term (less than one year) deposits and loans

Eurocredit is used for the market in medium- and long-term loans in the
Euromarkets
Is distinct from the actual currency the Euro!
More generally, the euro- prefix can be used to indicate any currency held in a
country where it is not the official currency: for example, euroyen or even
euroeuro
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Companies which are large enough to use the Eurosecurities

markets have four advantages:
Lower cost in both transaction costs and rates of return

Fewer rules and regulations leading to speed, innovation and lower
costs
Ability to hedge foreign currency movements
National markets are often not able to provide the same volume of
finance.

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Money market funds (MMFs)

type of open-ended mutual fund that invests in highly liquid short-term

financial instruments with maturities typically 90 days to less than one
year, most low-risk such as government securities, certificates of
deposit and commercial paper
MMFs seek to maintain a stable “net asset value” (“NAV,” i.e. the price
at which MMF investors can redeem their shares) at usually $1.00 per
share, but the NAV may fall below $1.00 per share and thus, investor
losses, while rare, are possible
usually easy access: withdraw money within hours

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Money market funds (MMFs)

In Europe, around 22% of short-term debt securities issued by

governments or by the corporate sector are held by MMFs.
They hold 38% of short-term debt issued by the banking sector.
Because of this systemic interconnectedness of MMFs with the banking

sector and with corporate and government finance, their operation has
been at the core of international work on shadow banking.
Institutional Money Market Funds Association (IMMFA)

http://www.immfa.org/

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Treasury Bills
T-bills are short term money market securities issued by the government
UK: the DMO issues T-bills to smooth the government’s cash needs over the
course of the year
US: T-bills are sold by Treasury Direct
T-bills are often taken as the “risk-free rate” because the credit and inflation
risks involved are negligible

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Commercial Paper
Commercial paper (CP) are short term money market instruments

issued directly by companies (rather than banks)
CP is unsecured and typically has a maturity of 3 months or less
Issuers must be listed companies with net assets of at least £25m
Most issuers have ‘investment grade’ credit ratings, i.e. BBB or above
The CP market is much smaller than the interbank or CD markets

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US commercial paper (USCP)

Largest commercial paper market in the world Image: https://www.sec.gov/files/primer-money-market-

funds-commercial-paper-market.pdf ( figure 1, page 1)
June 2020: US$1,007 billion
Of the issuance in June 2020, US$214 billion was US
asset-backed commercial paper (ABCP), i.e.
commercial paper secured on the collateral of assets
such as receivables – example mortgage, credit card,
vehicle loans
Because its maturity is less than 270 days,
commercial paper does not have to be registered with
the Securities and Exchange Commission

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Repos
A repo is a way of borrowing for a few days using a sale and repurchase
agreement in which securities are sold for cash at an agreed price with
a promise to buy back the securities at a specified (higher) price at a
future date
Used very regularly by banks and other financial institutions to borrow
money from each other
This market is also manipulated by central banks to manage their
monetary policy
The term for repos is usually between 1 and 14 days
A reverse repo (RRP).
Image on next slide: chart 1 on p. 29 of Fisher, M. (2002) “Special Repo Rates: An Introduction”, Federal Reserve Bank of Atlanta Economic Review
87(2), pp. 27-43. Available at: https://www.frbatlanta.org/-/media/documents/research/publications/economic-review/2002/vol87no2_fisher.pdf
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Local authority/municipal bills

Not common in the UK

Widely used in the US, Brazil, and Canada where they are issued by
many states, cities and local governments
In the US the interest (but not the capital gain) is generally free of
federal (and sometimes state and local) income taxes
Strong market in local authority bills and bonds in many European
countries
Many bill issues by companies close to governments e.g. the French
railway, SNCF, or the German postal service, Deutsche Bundespost.

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Certificates of deposit (CDs)

Issued by banks when funds are deposited with them by other banks,
corporations, individuals or investment companies
Maturities can be any length of time between a week and a year
(typically 1–4 months)
Lots ranging from £50,000 to £500,000 in the UK, or $100,000 to $1
million in the US
Non-negotiable CDs must be held by the depositor until the CD reaches
maturity
Negotiable CD traded in a secondary market.

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Comparing interest rates

Observations can be made about the interest rate on different money market
instruments:
- Generally, investors require extra return for longer lending periods
- The credit rating of the borrowing institution has a strong influence on the rate of
interest charged
- When expectations about future inflation rise, interest rates rise accordingly, which
leads to a decrease in the market price of money market instruments
- Supply and demand
- Money market interest rates with similar terms to maturity stay close together and
move up or down with quite a high degree of correlation over time
- Short-term interest rates can be lowered by central banks intervening in the markets.

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next steps
Please review the lecture 5 material and complete the week 5 required
reading, then attempt to answer the workshop 5 questions.
Try self-assessment quiz 5 and don’t forget about the Survey home work
and check out podcase 2.
Next Tuesday’s lecture (wk6) will be Q&A session about the class test.
Keep e-mailing topic suggestions for future Tuesdays.
… and attend tomorrow’s session!

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further help:
Come to any office hours – these are drop-in sessions, no appointment

needed! All details are on the AG991 myplace page.
Send any questions you may have by e-mail.
If you wish to see me outside of office hours, please e-mail to make

arrangements.
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X T
SH E APTLHACCLEY DOEF BUUSSEIFNUELS S
TR L ESACRHNOI N
OGL

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SW 3.07, Ext.: 3889, juliane.thamm@strath.ac.uk

© Juliane Thamm – University of Strathclyde

© Juliane Thamm – University of Strathclyde

A bond is like a loan, where the borrower is committed to pay

Unlike a traditional bank loan, a bond is tradable on the

We will look at bonds issued by governments and bonds

© Juliane Thamm – University of Strathclyde

Long-term contract in which the bond holder lends money to

© Juliane Thamm – University of Strathclyde

Bonds and equity compared

With a bond you are promised a return

Images on next slide

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Government bond markets

Sovereign bond markets

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Gilts in the UK, or Treasury bonds in the US

The government seeks to meet its borrowing requirements – e.g. to fund

Gilts typically have maturities from 1 year to 30 years. The money

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Distribution of gilt holdings

(£ millions) at end 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1

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UK gilts (gilt-edged securities)

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Most gilts are sold by auction, typically £300m - £3bn.

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Gilt Secondary Market

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UK Yield Curve 15 Oct. 2022

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Yield Curve / Term Structure

Ten Year Government Bond Yields

How do you explain yield difference across national markets?

US Treasury notes and bonds

Coupon payable every six months

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Local authority/municipal bonds

Issued by governments at a subnational level; not common in the UK

•US municipal bonds are usually tax exempt

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Corporate bonds come in a variety of forms:

Image on next slide is a screenshot from

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Subordination of further debt

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Bond Indenture (cont.)

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Straight, plain vanilla or bullet bonds

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Likelihood of payments of interest and/or capital not being

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Credit rating systems

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S&P Moody’s Description Indicative Spread

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Bond default rates

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Other forms of bonds

Convertible bonds (or convertible loan stocks) carry a rate of interest,