Question

4. How do T?bills, T?notes, and T?bonds differ?

5. Explain how and why the junk bond market had an impact on commercial bank lending.

6. Define the following terms:

(a) private placement

(b) asset?backed security

(c) callable securities

(d) sinking fund provisions

(e) convertible features of securities.

Answer 1

4. T. bills, T. notes, and T. bonds, each of these securities is issued by U.S. government to raise funds and to pay off debts. They are used as tools to fund its short- and long-term operations. Treasury bonds, notes and bills all differ in the lengths of time they are issued and the manner in which interest is been paid to the investors.

5. Prior to the development of junk bond market, low credit rating firms depended on banks for loans for funds. But bank would only offer short- term or variable rate medium term loans regardless of what borrower wanted and thus passing on the risk of interest on borrower. Thus, junk bonds came into market satisfying need of those borrowers replacing bank loans with marketable debt with longer maturities matching their cash flow needs.

6. (a) Private placement : Private placement is a funding through securities which are not sold through a public offering, but rather through a private offering, mostly to a small number of chosen investors. It is considered a cost-effective way for small businesses to raise capital without "going public" through an initial public offering (IPO).

(B). Asset backed security : An asset-backed security (ABS) is a financial security whose income payments and value is derived by collateralized of a pool of assets such as loans, leases, credit card debt, royalties or receivables.

(c) callable securities : A callable security has an embedded call option which allows issuer to redeem it prior to its maturity. If interest rates decline since the company first issued the security, the company is likely to want to refinance this debt at the lower rate of interest and thus exercise its call option.

(d) sinking fund provisions : Sinking fund provision require the issuer to retire a particular percentage of bond on an annual basis. This provision reduces the risk of default to investors.

(e) Convertible features of securities : Convertible features of securities is an option given to investors to convert their securities in another form of security.

bank loans for their funds. Banks would only offer short-term or variable rate medium-term loans regardless of the borrowers’ need, thus passing on any interest rate risk to the borrower. These firms had no alternative until the junk bond market developed and allowed them to replace bank loans with marketable debt with longer maturities matching their cash flow needs.Prior to the development of the junk bond market, low credit quality firms depended on bank loans for their funds. Banks would only offer short-term or variable rate medium-term loans regardless of the borrowers’ need, thus passing on any interest rate risk to the borrower. These firms had no alternative until the junk bond market developed and allowed them to replace bank loans with marketable debt with longer maturities matching their cash flow needs.Prior to the development of the junk bond market, low credit quality firms depended on bank loans for their funds. Banks would only offer short-term or variable rate medium-term loans regardless of the borrowers’ need, thus passing on any interest rate risk to the borrower. These firms had no alternative until the junk bond market developed and allowed them to replace bank loans with marketable debt with longer maturities matching their cash flow needs.Prior to the development of the junk bond market, low credit quality firms depended on bank loans for their funds. Banks would only offer short-term or variable rate medium-term loans regardless of the borrowers’ need, thus passing on any interest rate risk to the borrower. These firms had no alternative until the junk bond market developed and allowed them to replace bank loans with marketable debt with longer maturities matching their cash flow needs.