What are public debts that commercial banks commonly issue?

What is Underwriting?

The underwriter, often a bank, will guarantee the issuer that the debt will be placed at a certain price. If the bank does not succeed it will purchase the paper and keep it until it can sell it on (“on the shelf’). An underwriter can also underwrite an issue ‘at best efforts’, which mean they will not guarantee placement at a certain price.

What is Bookbuilding?

To mitigate the risk of underwriting, the arranging bank will start a bookbuilding process by contacting potential investors and asking them at what price they would be interested in the paper.

What are Private placements under SEC Rule 144a?

Corporate Bonds are issued for minimum amounts of USD100 million and sometimes for billions of dollars. Maturities are generally 5 to 10 years but in most markets can be for 25 years or longer.

Interest obligation of public debts

Public debts carry interest obligation which can be calculated and paid in a variety of ways:

What are floating and fixed rate?

Floating rate interest (coupon) payments are based on a fixed spread to a predetermined benchmark (e.g. 6 month LIBOR) and adjusted through the life of the debt. Fixed rate interest (coupon) payments are set at the time of issuance and do not change over the life of the debt. Corporate bonds are usually fixed rate, bank loans usually floating rate.

What are annual and semi-annual coupon?

Interest payments on domestic bonds are generally made on a semi-annual basis while Eurobonds generally have annual coupon payments.

What is step-up?

Interest (coupon) generally begins at a relatively low interest rate, generally for a period of three to five years. The rate then increases on predetermined dates to a predetermined, higher rate.

What is zero-coupon?

No interest (coupon) is paid on the loan or bond, but the debt is issued at a discount thus the principal payment at maturity will reflect the accumulated interest.

What is deferred-interest?

Interest (coupon) payments are deferred for a specified time. At the end of the deferment period cash interest is paid generally at a relatively high rate until maturity.

What is split-coupon?

These begin as zero-coupon bonds and pay no cash interest (coupon) for an initial period, generally three to seven years, then cash interest (coupon) is paid at a stated fixed rate until maturity

What is payment-in-kind (PIK)?

Allows the borrower the option to pay interest (coupon) either in cash or in like-kind securities. This option is allowed only for a specific period, generally three to five years

What is deep discount?

These bonds are issued at a price significantly lower that par value.

What is extendible reset?

Interest (coupon) rate is set so that the bond trades at a predetermined price. The coupon may be reset annually or only once. The reset rate is based on market conditions and reflects not only the new level of interest rates but also the new spread that investors seek.

Principal payments of public debts

What is sinking-fund provision?

The borrower retires a certain amount of the outstanding debt each year, beginning either the first year after issuance or after a predetermined deferment or grace period. Also known as amortisation by (semi)-annual equal instalments.

What is bullet repayment?

The borrower repays the principal in total at the final maturity date.

What is balloon repayment?

The borrower starts repaying the principal in the concluding years of the life of the loan, with a final repayment at maturity.

What is annuity repayment?

The borrower pays a fixed (semi) annual sum during the lifetime of the loan. The fixed sum incorporates a repayment and interest element (similar to some house mortgage loans).

What is perpetual?

This type of debt does not require any repayment.

What is call provision?

The issuer has the right to retire the debt, fully or partially, before the scheduled maturity date.

What is put provision?

The investor has the right to sell the debt back to the issuer at a designated price on designated dates.

What is Dual or Multi Currency?

Different tranches of a debt offering can be issued and repayable in different currencies, or by reference to different currencies.

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