Title LM03 Fixed-Income Issuance and Trading IFT Notes.pdf ✅

LM03 Fixed-Income Issuance and Trading 2024 Level I Notes © IFT. All rights reserved 1 LM03 Fixed-Income Issuance and Trading 1. Introduction ........................................................................................................................................................... 2 2. Fixed-Income Segments, Issuers, And Investors ..................................................................................... 2 3. Fixed-Income Indexes ........................................................................................................................................ 4 4. Primary and Secondary Fixed-Income Markets ...................................................................................... 5 Summary ...................................................................................................................................................................... 9 This document should be read in conjunction with the corresponding learning module in the 2024 Level I CFA® Program curriculum. Some of the graphs, charts, tables, examples, and figures are copyright 2023, CFA Institute. Reproduced and republished with permission from CFA Institute. All rights reserved. Required disclaimer: CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by IFT. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute. Version 1.0
LM03 Fixed-Income Issuance and Trading 2024 Level I Notes © IFT. All rights reserved 2 1. Introduction This learning module covers:  Types of fixed income market segments  Types of fixed-income indexes  Primary and secondary fixed-income markets 2. Fixed-Income Segments, Issuers, And Investors Fixed income markets are often categorized along three dimensions: issuer type, credit quality and time to maturity. Sometimes they may also be categorized along additional features such as currency, geography, and ESG characteristics. Classification by Type of Issuer Bond markets may be divided into four categories based on the type of issuers: 1) Households 2) Non-financial corporates 3) Government 4) Financial institutions Classification by Credit Quality Investors face credit risk, i.e., the risk of loss if the issuer fails to make timely payments of interest and principal as they come due. Rating agencies like Moody’s, S&P, and Fitch assign credit ratings to bonds. Bonds with a rating of BBB or above are considered investment grade. Bonds below this rating are considered junk bonds. This differentiation is important as certain investors such as banks and life insurance companies may not be allowed to invest in junk bonds but only in investment grade bonds. Classification by Maturity Fixed-income securities can also be classified by the original maturity of the bonds when they are issued:  Money market securities: They are issued with a maturity at issuance that ranges from overnight to one year. For example, T-bills issued by the US government or commercial paper with short maturities issued by the corporate sector.  Capital market securities: The original maturity is usually longer than a year. Exhibit 1 from the curriculum illustrates typical issuers and instrument types across credit and time-to-maturity segments.
LM03 Fixed-Income Issuance and Trading 2024 Level I Notes © IFT. All rights reserved 3 Fixed-income investors take positions across the credit and maturity spectrums in order to gain exposure to specific risks and match the cash flows of known future obligations. Near-term obligations and liquid cash alternatives are often met with money market securities, while long-term bonds may be used to meet obligations further in the future or to achieve a higher expected return. Pension funds and insurance companies with long investment time horizons prefer fixed- income instruments with fixed periodic coupon cash flows and a maturity profile that matches their long-term liabilities. Hedge funds and distressed debt funds may take additional credit risk at any point on the maturity spectrum to pursue higher expected return. Exhibit 2 from the curriculum illustrates common investor positions across the credit and maturity spectrums.
LM03 Fixed-Income Issuance and Trading 2024 Level I Notes © IFT. All rights reserved 4 Sovereign government issuers typically have the lowest credit risk (and the highest credit rating - AAA). Investors in investment-grade bonds anticipate more consistent cash flows. Defaults by investment grade issuers are extremely rare. High-yield investors expect a higher return in exchange for assuming a higher risk of default. 3. Fixed-Income Indexes Like equity market indexes, fixed income indexes also track the returns of groups of securities that meet their inclusion criteria. Fixed income indexes can be used to evaluate market performance, benchmark the performance of investments and investment managers, and serve as the foundation for indexed investment strategies. Fixed income indexes differ from equity indexes in three ways: 1. In contrast to equities, where issuers typically issue just one or two instruments, issuers often have many fixed-income instruments outstanding. For example, at the end of 2021, Apple Inc had a singe equity instrument but over 80 fixed income instruments outstanding. Therefore, fixed-income indexes tend to have many more constituent securities than equity indexes and are difficult to replicate. 2. Because bonds have a finite maturity and new bonds are issued on a regular basis, fixed income index constituents change far more frequently than equity index constituents. Therefore, fixed income indexes require frequent rebalancing.