investing in the future using the australian fixed income markets by

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  • Slide 1
  • Investing in the Future Using the Australian Fixed Income Markets By
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  • Contents Part 1 Australian Bond Market Characteristics 1.Investments available 2.Explanation of Securities 3.Who issues Bonds 4.Ratings - Standard and Poor's, Fitch, Moody's Part 2 How it works 1.Underlying investment premise 2.What affects yield 3.What causes credit risk premium to change 4.Yield curve 5.Markets Supras, Federal & Semi Government, Govt Guarantee Bank Fixed &Floaters, Corp Fixed & Floating and CPI Indexed Bonds Part 3 Market Changing 1.Changes in the Market 2.Current Disconnect with Deposits 3.Current disconnect with Discounts 4.Current disconnect with Bonds Part 4 The Future - Issuing Bonds 1.Debt Capital Markets Intro 2.What is a debt strategy 3.The debt strategy process 4.Critical Areas That Will Affect Outcome Part 5 - How does Gilt Investments Pty Ltd fit in ? 1.Who is Gilt Investments Pty Ltd 2.Criteria for consideration 3.Reasons for setting up your portfolio 4.Deposits part of Fixed Income market 5.What to Look for 6.Contact Details
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  • PART 1 Bond Market Characteristic's
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  • Less than 1 year to maturity Discounted investments (Short term money market) Greater than 1 year to maturity Bond investments (Long term capital markets) Investments available in the Australian interest rate markets
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  • Less than 1 year to maturity Cash & Short term deposits with: Major Bank Foreign Bank Regional Banks Credit Union Building Society Discount Securities issued / sold by: Bank Bills Promissory Notes Negotiable Certificate of Deposit (NCD) Treasury Notes Discounted & yield investments Greater than 1 year to maturity
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  • Floating Rate Notes (FRNs) Bonds (fixed rate) Government Semi government Corporate Inflation linked ASX listed hybrids Income Securities Convertible Notes or Preference Shares Structured products Collateralised Debt Obligations (CDOs) Bond Investments Less than 1 year to maturity
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  • Explanation of Securities Cash - is the most liquid of investments generally referred to as a 24 hour call deposit or 11am term deposit - funds can be accessed any time. Term deposits - all approved deposit taking institutions (ADIs) will quote interest rate yields on set, fixed maturities (terms) for deposits. Discount securities - in order to provide investors with the ability to sell their investments, institutions will issue securities to investors. The securities are offered at a discount to their face value using a discount formula. The full face value of a discount security is paid out on maturity. - More on discount securities next Discount Investments
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  • Bank Bills (or Bills of Exchange) - A bill of exchange that has been accepted or endorsed by a bank. This puts primary liability for repayment of the bill onto the bank which accepted the bill. Negotiable Certificate of Deposit (NCD) - is similar to a bank deposit, but instead of the ownership being recorded in a register by the bank, there is a certificate issued. Again - it is negotiable in that whoever holds the certificate owns the claim on the cash flow at the end. The terms of NCDs can range over many years, but we usually only refer to those that mature within 1 year. Promissory Note - An unconditional promise to pay to the holder of the note a fixed amount (face value) at a fixed date (maturity date). Defined more fully in the Bills of Exchange act as: "an unconditional promise in writing by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money for or to the order of a special person or to bearer" Treasury Note - Commonwealth Government issued short term securities for 5, 13 and 26 week periods, issued at a discount from face value Explanation Continued
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  • Floating Rate Note Bonds (FRNs) - Similar features to bonds except that the periodic coupon payments are not equal. Payments are reset in line with a given market indicator each period. Usually set as a margin above the bank bill rate. Fixed Bonds - Term to describe a fixed-rate transferable debt instrument that is an financial obligation for the issuer to pay, a fixed sum (face value) at a specified date (maturity date); and a series of equal periodic payments called coupon payments. Hybrids - These securities are subordinated in nature and convertible to shares either at maturity or at a given date in the future. Before conversion pay either a fixed or floating coupon. Structured products - Collateralised Debt Obligations (CDOs) - are complex structured products typically arranged by investment banks with a range of tranches that are independently rated by a credit rating organisation. o If none of the underlying portfolio of securities default over the life of the CDO, investors will receive their capital back in full. If more than a handful defaults, investors capital is at risk. Bond Investments
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  • Commonwealth Government via the Reserve Bank State Government Australian Companies International issuers Banks Finance Companies Special issuers e.g. infrastructure, mortgage backed Who issues bonds to borrow from market
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  • Standard & Poor's long-term ratings The following are considered investment grade assets. AAA - The borrowers capacity to meet its financial commitment on the obligation is extremely strong AA - The borrowers capacity to meet its financial commitment on the Obligation is very strong A - The borrower is more susceptible to the effects of changes in economic conditions. The borrowers capacity to meet its financial commitment on the obligation is strong. BBB A borrower shows adequate protection parameters. However, lowering economic conditions are more likely to result in a fragile capacity by the borrower to meet its financial commitment.
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  • Standard & Poor's long-term ratings The following are considered non-investment grade i.e. considered to be speculative and investors should seek advice or be aware before investing. BB - Less vulnerable B - More vulnerable CCC - Currently vulnerable CC - Currently highly vulnerable C - Payments are still being made but bankruptcy proceedings have been filed. D - In default
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  • PART 2 How it Works
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  • The greater the risk the greater the return Risk Return
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  • What affects the Yield Before you buy any fixed income investment you need to know what affects the yield. This then guides you towards what to buy, after an investment policy has been put in place; Inflation Premium Credit Premium Liquidity Premium Market influences
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  • To get the yield the risk premium needs to be added to the nominal rate of interest Real Yield + Inflation Premium = Nominal Yield Nominal Yield + Risk Premium = Security Yield
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  • What causes credit risk premiums to change Industry volatility Term to maturity Financial stability & gearing Liquidity Management decisions
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  • The Yield Curve What is it? How can it move? What effect does this have on bond values? How do I manage it?
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  • % Normal yield curve
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  • Yield curve changes shape 10 yr - Yields up 0.1% Price down approx. 1.0 % 2 yr - Yields up 1% Price down approx. 2 %
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  • The yield curve changes again 10 year - gains 5 % in value 2 year - loses 1% in value 4 year - no change in value
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  • Supranational Bonds
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  • Federal & State Government Bonds
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  • Bank Government Guaranteed Fixed
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  • Bank Government Guaranteed Floating Rate Notes
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  • Corporate Fixed Bonds
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  • Corporate Floating Bonds
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  • CPI Indexed Bonds
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  • PART 3 Market Changing
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  • Changes in the Bond Market New Basel Rules guiding Banks capital adequacy, stress testing and market liquidity risk. Foreign Bank Branches Wholesale Pricing vs. Retail Pricing Retail get above benchmark Compliance on Financial Planners Shrinking Competition and Dominance of the Majors Banks Shadow Banking influence
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  • Current disconnect to Deposit Markets
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  • Current disconnect to Discount Markets
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  • Current disconnect in Bond Markets
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  • PART 4 Issuing Bonds Into The Market
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  • Debt Capital Markets - Introduction Context Every business should have a sound understanding of debt capital markets, including: The role of debt in funding a borrowers assets; The benefits and risks of using debt compared with other sources of capital (equity); The different types of debt available; Potential sources of debt; Pricing of debt; and Covenants, reporting requirements and review processes required by debt providers. Why is this Important? A borrower can minimise its capital cost (taking into consideration its risk profile) by optimising its debt to equity ra


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