Home › CFA® Level I › Fixed Income
CFA® Level I · Fixed Income · free lesson
Fixed-Income Markets for Corporate Issuers
Companies and banks borrow every day: for a few days to fund payroll or inventory, and for decades to fund factories and acquisitions. This module compares the short-term funding tools available to non-financial companies and financial institutions, explains how repurchase agreements work and where their risks lie, and contrasts how investment-grade and high-yield issuers raise long-term debt.
What you will learn
1. Compare the short-term funding alternatives available to non-financial companies and financial institutions, including bank lines of credit, secured loans, factoring, commercial paper, deposits and wholesale funding.
- Uncommitted lines are cheapest but least reliable; revolving credit agreements are the most reliable bank facilities.
- Secured loans and factoring use receivables or inventory and suit weaker borrowers.
- Commercial paper is unsecured, short-term and cheap for highly rated issuers, but carries rollover risk; backup lines mitigate it.
- US CP is issued at a discount (360-day basis); euro CP is usually quoted on an add-on basis.
- Banks fund with retail deposits (stable) and wholesale funding (flexible but flighty): interbank, CDs, CP, repos, central bank.
2. Explain how repurchase agreements work, calculate repo interest and repurchase prices, and describe the factors that affect repo rates and haircuts and the risks involved.
- Repo = sale plus agreed repurchase: a collateralized loan; the cash lender's side is a reverse repo.
- Cash lent = collateral value x (1 - haircut); repurchase price = cash lent x (1 + repo rate x days / 360).
- Riskier, less liquid or longer-dated collateral and longer terms mean higher repo rates and larger haircuts.
- Securities in high demand trade special, at lower repo rates.
- Risks: counterparty default, collateral value, margining, legal and settlement.
3. Describe how investment-grade corporate issuers raise long-term debt, and explain the features of their bond funding.
- IG issuers borrow mostly through senior unsecured bonds with few covenants.
- They issue across the maturity spectrum, often in several tranches, to spread refinancing risk.
- Large benchmark deals in several currencies, issued frequently, often under shelf registration.
- Calls, if any, are usually make-whole, so investors face little refinancing-driven call risk.
- IG spreads are tight; protecting the rating keeps access to the broad investor base.
4. Contrast the long-term funding of high-yield issuers with that of investment-grade issuers, including the use of secured debt, covenants, maturities and call features.
- HY capital structures are layered: secured bank loans, secured bonds, senior unsecured and subordinated bonds.
- HY bonds carry many incurrence covenants and a change-of-control put, usually at 101.
- Maturities are shorter (typically 5-10 years) and bonds are callable after a non-call period at declining premiums.
- Spreads are much wider and market access can close in recessions.
- Fallen angels lose IG investors and must refinance on HY terms; rising stars gain access to IG funding.
Module at a glance
- Revolvers are the most reliable bank facility; uncommitted lines are the least reliable.
- Commercial paper is cheap, unsecured and short-term, but needs backup lines to manage rollover risk.
- Banks fund with stable retail deposits and flexible but flighty wholesale funding.
- Repo cash = collateral x (1 - haircut); repurchase price adds repo interest on an actual/360 basis.
- Riskier collateral, longer terms and weaker borrowers mean higher repo rates and haircuts.
- IG issuers: unsecured, long-dated, light covenants, make-whole calls, tight spreads.
- HY issuers: layered secured debt, many covenants, shorter maturities, call schedules, wide spreads.
This free module has 4 lessons, 12 practice questions with full explanations.