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DebtBonds

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Bonds

• In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. It is a formal contract to repay borrowed money with interest at fixed intervals.[1]

• Thus a bond is like a loan: the issuer is the borrower, the bond holder is the lender, and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds.

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• Domestic bonds are denominated in the issuer's local currency and offered to local investors. Foreign bonds are those offered to investors outside the issuer's own country of registration and are denominated in the currency of the market where they are listed. Eurobonds, marketed internationally, are issued outside the issuer's country of registration in a currency other than that of the market where they are listed.

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BondsAn Early Example

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Figure 24.2 A Bearer Bond and Its Unclipped Coupons Issued by the Elmira and Williamsport Railroad Company

for $500

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BondsThe Issuing Process

• The mandate• Appointing the lead manager (see the parties involved) and, advised by them, choosing the size, structure and

timing of the bond issue.•  • Due diligence • Providing and verifying all the information required for the issuer's listing document and the supporting

documentation. Legal advisers lead this work. •  • Preparation • Preparing the documents including the information memorandum and listing particulars and presenting them to

the UKLA and the Exchange. •  • Launch • With the due diligence and marketing completed, this is the official announcement of the bond issue when the

lead manager invites the syndicate (see the parties involved) to participate in placing the bonds with investors.•  • Signing and closing • The signing is when an issuer and their advisers sign and execute all the documents. Shortly after this and the

closing, the issuer receive the proceeds of their bond issue. •  • Secondary market trading• With the bonds now listed on the London Stock Exchange they are eligible to be traded by investors, either on the

open market or, in the case of Eurobonds, by private deals between institutional investors. Ref; the London stock Exchange

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• Parties involved • There are a number of parties to every bond issue, each with their own role to play in assisting the issuer and ensuring the

issue's success. Here we summarise the roles of the main players. 

• Lead manager and syndicate• The lead manager, normally a financial institution such as an investment bank, is responsible for managing the entire issue process. As

well as advising the issuer on the structure and timing of the issue, the lead manager appoints the syndicate, a group of investment banks that will market and sell (and, usually, underwrite) the issue.

•  • Legal advisers• Responsible for the due diligence process – verifying statements of fact - and for the drafting of the listing particulars and the supporting

documentation.•  • Paying agents• The paying agent is responsible for receiving a bond's interest payments from the issuer and distributing them to the bondholders.•  • Clearing systems and depositary• Euroclear and Clearstream are the two main systems for monitoring and validating the transfer of bonds ('clearing') listed in London – in

both the primary and secondary markets. Most bonds are issued in bearer form and held by a depositary (usually a bank) for safe keeping.

•  • Trustee• Appointed by the investors in the notes, the trustee is the representative of the bondholders, charged with protecting their rights and

ensuring the terms of the bond are adhered to. •  • Fiscal agent• Acts on the behalf of the issuer to ensure the payment of interest and principal.•  

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BondsThe Issuing Process

Typical Time LinesMandate Launch Signing Closing

3 to 8 weeks up to 2 weeks up to 1 week

London Listing

UKLA

LSE

Listing application

Listing particularsapproved

Listing granted Listing effective

Application for admission to trading

Admission granted Trading may begin

*10 clear business days 2 days

1 day

** 2 days

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