Question

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Fill in the blank

A: (Coupons / Bond Price)

B: (Bond Price / Par Value)

The entity issuing the debt obligation is the borrower in the transaction. Some of the biggest issuers in the bond market are (1)(municipial governments / central governments / corporations)   , such as the U.S. government and the government of U.K.; (2) government-related agencies, such as Fannie Mae and Freddie Mac; (2) (corporations / supranational banks / municipal governments), such as the state of California, Sakai City, Japan; (3)(supranational banks / corporations / central governments), such as British Telecom, and The Walt Disney Co. and (4)(supranational banks / corporations / central governments), such as the European Investment Bank and the World Bank.

Economies around the world were still recovering during 2012 after the 2008–2009 recession. Governments and central banks continued their efforts to facilitate economic recovery. The U.S. Federal Reserve Bank (the Fed) kept interest rates at record lows. This, along with several other reasons, found the bond markets flooded with new bond issues. The following article highlights some reasons why firms issued debt obligations to raise funds.

In the context of the reasons why entities borrow in the form of bond issues, which statement is correct? Check all that apply.

When equity markets are turbulent and investors prefer relatively safer fixed-income securities, bond markets become a safe place to invest. This leads to increased demand, thus encouraging corporations to supply fixed-income securities.

Investors looking for tax-exempt income are likely to invest in companies that pay high dividends.

When investors look for instruments that help generate income and have lower risk levels—as compared to equity offerings—they are eager to invest in debt obligations.

Bond coupon payments are borrowing costs for issuers. When interest rates are low, borrowing cost is low, thus more conducive for issuers to lock in low costs.

The article highlights an important relationship between the corporate bond yields and the U.S. Treasury yields. When demand for Treasuries increases, prices rise and yields(fall / rise). All else being equal, this leads to the(narrowing / widening)    of corporate bond yields because they are riskier and their yields are (higher / lower)   than U.S. Treasury yields. However, this does not necessarily imply that particular changes in the Treasury yield will lead to similar changes in the corporate bond yields. A corporate bond with a narrow yield spread and high credit rating will offer a relatively (low / high)  return when the bond is purchased. However, if the yield spread widens, the price of the bond will(rise / fall), thus (decreasing / increasing  the value of the fixed-income asset class in the investor’s portfolio.

Answer 1

central government
municipal governments
corporations
supranational banks

When U.S> treasury yields are low and the spread between the Treasury and corporate bond yield is narrow, issuers can lock in low costs of borroing through bond issues

falls
widening
higher
low
fall
decreasing