Question 1

The secondary market for Eurobonds

Accepted Answer

The secondary market for Eurobonds is not an organized exchange, but rather an over-the-counter market where these bonds are traded between investors.

Question 2

Underwriters for an international bond issue will commit their own capital to buy the issue from the borrower at a discount from the issue price. The discount, or underwriting spread, is typically

Accepted Answer

The underwriting spread for international bond issues is typically in the 2 to 2.5 percent range.

Question 3

A bond market index

Accepted Answer

A bond market index is similar to a stock market index, but tracks the performance of a portfolio of bonds rather than stocks. It provides a benchmark for measuring the performance of a particular bond portfolio or the overall bond market. It is not used to set the coupon rate or a price-weighted average of all existing bonds.

Question 4

A disproportionate share of Eurobonds have high credit ratings in comparison to domestic and foreign bonds. (Approximately 40 percent of Eurobond issues are rated AAA and 30 percent are AA). Explanations for this include

Accepted Answer

The high credit ratings of Eurobonds can be explained by both the withdrawal of low ratings by issuers (A) and the fact that the market is accessible mainly to firms with good credit ratings and name recognition (B).

Question 5

The credit rating of an international borrower

Accepted Answer

The credit rating of an international borrower is usually never higher than the rating assigned to the sovereign government of the country in which it resides. This is because the borrower's ability to repay its debt is ultimately tied to the economic and political stability of the country it operates in, which is reflected in the sovereign rating.

Question 6

The role of an underwriter is to

Accepted Answer

An underwriter's role involves all of the above tasks, including negotiating terms with the borrower, ascertaining market conditions, and managing the issuance process. The underwriter works closely with the issuer to determine the appropriate terms and structure for the offering, then markets the securities to potential investors. Once the offering has been priced and the securities have been sold, the underwriter manages the distribution of funds to the issuer.

Question 7

The J. P. Morgan and Company Global Government Bond Index is __________ representation of the individual country government bond indexes.

Accepted Answer

The J. P. Morgan and Company Global Government Bond Index is a value-weighted representation of the individual country government bond indexes. This means that the weight assigned to each country's government bond index is based on the total value of all outstanding bonds in that index.

Question 8

With regard to clearing procedures for bond transactions, when a transaction is conducted, electronic book entries are made that transfer book ownership of the bond certificates from the seller to the buyer and transfer funds from the purchaser's cash account to the seller's. However,

Accepted Answer

In modern bond transactions, physical transfer of the bonds is typically not necessary or practical. The transaction is settled through book entries and electronic transfer of funds.

Question 9

Suppose your firm needs to raise €100,000,000 with a one-year bond with a coupon rate of 8 percent per annum. The underwriting spread is 2 percent. What should the amount of the bond offering be?

Accepted Answer

The amount of the bond offering can be calculated using the following formula:

Amount = (Coupon Rate * Face Value) / (1 - Underwriting Spread)

We know that the coupon rate is 8%, the underwriting spread is 2%, and the firm needs to raise €100,000,000. To solve for the face value, we can rearrange the formula as follows:

Face Value = Amount * (1 - Underwriting Spread) / Coupon Rate

Plugging in the numbers, we get:

Face Value = €100,000,000 * (1 - 0.02) / 0.08 = €102,040,816.30

Therefore, the amount of the bond offering should be €102,040,816.30, which is closest to option B.

Question 10

Market makers in the secondary bond market

Accepted Answer

Market makers in the secondary bond market stand ready to buy or sell for their own account, quote bid and ask spreads, and trade directly with one another, through a broker or with retail customers. Therefore, all of the above is the correct answer.

Question 11

In any year, the Eurobond segment of the international bond market accounts for approximately what percent of new bond offering?

Accepted Answer

The answer of In any year, the Eurobond segment of...

Question 12

Investors in corporate bonds would still be interested in sovereign credit ratings

Accepted Answer

Sovereign credit ratings usually serve as a ceiling for corporate credit ratings within the same country. Therefore, investors in corporate bonds would still be interested in sovereign credit ratings to make informed decisions about the investment potential of corporate bonds. Option B is irrelevant as it refers to a different concept (the spread between the interbank lending rate and the government bond yield). Option C is also incorrect as there is no requirement for a country's regulators to assign credit ratings.

Question 13

Eurobond market makers and dealers are members of the ______________, a self-regulatory body based in Zurich.

Accepted Answer

Eurobond market makers and dealers are members of the International Capital Market Association (ICMA), a self-regulatory body based in Zurich. Therefore, the correct answer is D. The other options (A, B, and C) do not exist or are not related to the Eurobond market.

Question 14

Suppose your firm issues a €100,000,000 one-year bond with a coupon rate of 8 percent per annum. The underwriting spread is 2 percent. Your actual cost of this debt is

Accepted Answer

The actual cost of the debt is calculated by adding the underwriting spread to the bond's yield to maturity. The yield to maturity is the rate required by investors to purchase the bond. 
Therefore, the yield to maturity is:
100,000,000 x 8% = 8,000,000
100,000,000 + 8,000,000 = 108,000,000
The underwriting spread is 2 percent of the face value of the bond, which equals:
100,000,000 x 2% = 2,000,000
The actual cost of the debt is:
(8,000,000 + 2,000,000)/100,000,000 = 10.2%
Therefore, the correct answer is C, 10.2 percent.

Question 15

Two major clearing systems for international bond transactions are

Accepted Answer

Euroclear and Clearstream International are the two major clearing systems for international bond transactions. Deutsche Börse Clearing and Cedel International do not specialize in international bond transactions. Clearasil is a brand of acne treatment products and is not a clearing system for financial transactions.

Question 16

The Wall Street Journal publishes daily values of yields to maturity for Japanese, German, British, and Canadian Government bonds.

Accepted Answer

The daily values of yields to maturity for Japanese, German, British, and Canadian Government bonds published by The Wall Street Journal allow bond market participants to compare both the yield curve and the term structure of interest rates of these countries. Therefore, both options (a) and (b) are correct.

Question 17

The underwriting syndicate of a bond offering is

Accepted Answer

The answer of The underwriting syndicate of a bond offering...

Question 18

In the bond market, there are brokers and market makers. Which of the following are true?

Accepted Answer

A) This is true. Brokers act as middlemen between market makers and other buyers/sellers.
B) This is also true. Brokers charge a small commission for their services to market makers.
C) This is partially true. While brokers primarily deal with other market participants, some brokers do deal directly with retail clients. However, this is not true for all brokers.

Question 19

With regard to clearing procedures for bond transactions

Accepted Answer

Clearing procedures for bond transactions serve multiple purposes, including transferring ownership of bonds, facilitating payment between buyers and sellers, and minimizing counterparty risk for market participants. Most Eurobond trades clear through two major clearing systems, Euroclear and Clearstream. Therefore, all of the given options (A, B, and C) are correct.

Question 20

Underwriters for a domestic bond issue will commit their own capital to buy the issue from the borrower at a discount from the issue price. The discount, or underwriting spread, is typically

Accepted Answer

The underwriting spread for a domestic bond issue is typically in the 1 to 1.5 percent range. This spread compensates the underwriters for their services and the risks they take by committing their own capital.

Quiz 12: International Bond Market