Fixed-Income Issuance and Trading for CFA Level I

What this chapter covers

Fixed-Income Issuance and Trading: topics in the order to study them

1. 1Fixed-Income Instrument Types and IssuersIt gives you the vocabulary of issuers and instruments that every later topic assumes.
2. 2Primary Market: Bond Issuance MechanismsOnce you know who issues, you can learn how new bonds are sold: underwriting, auctions, private placements and shelf registration.
3. 3Secondary Bond Markets and Trading VenuesTrading of existing bonds makes sense after you know how they were first issued; it covers dealers, OTC markets, liquidity and settlement.
4. 4Short-Term Funding: Repo and Commercial PaperIt is the most mechanical topic and builds on issuer and market knowledge, so it fits last.

How to prepare Fixed-Income Issuance and Trading

1. Read each topic once for the big picture, then build a one-page comparison sheet of issuer types, with who issues, typical purpose and credit quality.
2. List the primary market methods side by side: public offering, private placement, underwritten, best efforts, auction and shelf registration. Write one distinguishing feature for each.
3. For the secondary market, note why most bonds trade OTC, how dealers quote bid and ask prices, and what drives liquidity.
4. Study repo as a transaction: a seller of securities agrees to repurchase them later at a higher price. Draw the cash and collateral flows for both parties and name the repo rate, the haircut and margin. The haircut is the initial margin: the collateral's value exceeds the cash lent. Variation margin is the adjustment made as the collateral's value changes.
5. Compare commercial paper with other short-term funding on maturity, security, credit support and who issues it.
6. Practise three-option questions on each topic. For every wrong choice, write down the exact word or condition that makes it wrong.
7. Revisit your comparison sheet twice in the final week and test yourself from memory.

Common mistakes in Fixed-Income Issuance and Trading

• Mixing up primary and secondary market activities.

  Fix: Ask one question: does the issuer receive the proceeds? If yes, it is primary. If investors trade with each other, it is secondary.

• Confusing underwritten offerings with best-efforts offerings.

  Fix: Remember who carries the risk. In an underwritten deal the bank does; in best efforts the bank only tries to sell.

• Treating a repo as a simple sale or as a loan to the securities seller.

  Fix: Draw both legs. The securities seller receives cash now and repays more later, so it is the borrower. The securities act as collateral.

• Assuming bonds trade mainly on exchanges like equities.

  Fix: Remember that most bonds trade OTC through dealers, which is why liquidity and quote spreads matter.

• Confusing which party is the lender in repo and reverse repo.

  Fix: Anchor on the cash. The party that lends cash against collateral is doing the reverse repo; the party that receives cash is doing the repo.

• Memorising lists of issuers without their features.

  Fix: For each issuer, attach one fact about purpose, credit quality or typical issuance method so you can answer scenario questions.

Last-day revision: Fixed-Income Issuance and Trading

• ✓Issuers include sovereigns, non-sovereign government and quasi-government entities, agencies, supranationals, corporates and securitisation vehicles; know the typical credit and purpose of each.
• ✓Primary market means new issuance; secondary market means trading of bonds already issued.
• ✓In an underwritten offering the investment bank takes on the risk of selling the issue; in best efforts it does not guarantee the sale.
• ✓A private placement is sold to a small group of investors, usually without full public registration.
• ✓A shelf registration lets an issuer register once and sell in portions later.
• ✓Government bonds are often sold by auction.
• ✓Most bonds trade over the counter through dealers, not on exchanges.
• ✓Dealers quote a bid price (where they buy) and an ask price (where they sell); the difference is the spread.
• ✓A repo is a sale of securities with an agreement to repurchase them at a set later date and price; the seller is borrowing cash and the buyer is lending it.
• ✓The repo rate is the implied interest on the cash lent; the haircut is the initial margin, so the collateral's value exceeds the cash advanced.
• ✓Variation margin is the adjustment made as the collateral's value changes, so the lender stays protected.
• ✓Commercial paper is short-term, usually unsecured, and issued by creditworthy firms to fund working capital.
• ✓Reverse repo is the same trade seen from the cash lender's side.

Fixed-Income Issuance and Trading practice questions

• Which of the following is most likely a feature of commercial paper as a fixed-income instrument?
• A dealer quotes a bond at 98.40 bid and 98.70 ask per 100 par. An investor buys EUR 5 million par and immediately sells it back to the same …
• A bond issued by a municipal water authority is serviced solely from fees collected from customers of the water system, not from the issuer'…
• A corporate issuer wants flexibility to sell bonds in several tranches over the next two years, whenever market conditions look favorable, w…
• A bank borrows €10,000,000 in a 30-day repo with a repo rate of 3.6% per year on a 360-day basis. The repurchase price is closest to:
• Compared with a repo agreement backed by high-quality government bonds, a repo backed by lower-quality, less liquid collateral will most lik…
• In secondary bond markets, most government bonds and corporate bonds are most likely traded through which of the following arrangements?
• Compared with a repo with a high-quality government bond as collateral, a repo against a lower-quality, less liquid corporate bond is most l…

Fixed-Income Issuance and Trading in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• NISM CertificationsInvesting in Stocks (NISM XXI-A)
• CA IntermediateFinancing of Working Capital
• FRM Part IIRepurchase Agreements and Financing