CHARLES STURT UNIVERSITY
Task: The Australian Corporate and Government debt market
FIN 530 Assignement 2
Lecturer: Ruhina Karim
* Executive summary
The purpose of this report is to review corporate and government debt market of Australia. The report illustrates effect of GFC to Australian corporate and government debt markets and how Australia managed debt market during that period. The main finding are that Australian economy was not effected in that extend as rest of the world. Australian banks were concentrated in domestic market rather than investing offshore. Also government provided guaranty which supported debt market and saved it from default. Furthermore, it examines the shortage of supply in debt market. There are only a few offers of corporate debt available for retail investors through ASX. Analyze shows that the most of Australian debt issuers are rated as low risk investment companies which make issued securities high liquid and increases demand among investors who seeks for low risk and fixed income. It also analyses pricing, interest rate and guaranty that different bonds offer. Government bond are the closest security to risk free investment and yields are the lowest compliance with risk. The report analyses different sources (such as RBA, ASB S&P, ASX and other financial institutions), related to the debt market of Australia and provides overview of current situation with expectations. It also demonstrates the role of foreign investors in debt market of Australia with recent changes.
Table of Contents
Corporate debt market
Government debt Market
The Debt market plays crucial role in economy of every country as it is one of the main sources of finance for both Corporate and Government. Furthermore, an organization tries to maintain optimal debt level vs. equity that would make an organization attractive for the investors (James & John, 1980). Also, to be able to control cash flow and pay current liabilities on time. On the other hand, issuing security is costly and there is a high requirement to issuer. For that reason mainly banks and other multibillion companies issue bond. Small companies prefer to take loan form financial institutions. The role of debt market for the government is quite similar as for corporation: to be able to control cash rate as per monitory policy and regulate budget cash flow. Australian government issues treasury bills (short term) and treasury bonds (mid-term and long term). Also different states can issue bond securities to finance Public Trading Enterprises that called semi government bonds. Demand for CMS and SGB from offshore investors has increased after GFC benefiting Australia debt market. Government and the financial institutions are the key players in Australian debt market. The recent changes in legislation and requirements for securities, via implementation of Basel III are expected to have positive impact on the corporate and the government debt markets.
2. Analyze of Corporate debt market.
There are a few different type of corporate bonds can be purchased in Australia debt market: Fixed rate bonds with fixed coupon; Floating rate notes with variable coupon; Inflation-indexed bonds with fixed coupon plus inflation rate; Hybrid bonds with option to turn it to equity and Kangaroo bonds that issued by non-residents (Phillips, 2012). Australian corporate debt market is one of the most regulated debt markets in the world. The reason for that to secure debt buyers from loss of the investment as it did happen in US during GFC by selling high risk CDOs with low yield rate of return. Because of this fact, ordinary people perception was that CDOs have low risk. In the end CDOs were not secured according to risk. In Australia, corporate bonds provide investors...
References: ASB. (2013, 8 18). Australian Bureau of Statistics. Retrieved 8 20, 2013, from http://www.abs.gov.au: http://www.abs.gov.au
Dale, M. (2011). The Australian Bond Market: A Profile for Defensive Investors. Sydney: PIMCO Australia Pty Ltd.
Davis, K. (2012). Australian Corporate Bonds. Australia: National Australia Bank Limited.
Debelle, G. (2013). Some recent (and not so recent) trends in Australian debt. Sydney: KangaNews DCM Summit 2013.
James, M., & John, E. (1980). THE WEIGHTED AVERAGE COST OF CAPITAL, PERFECT CAPITAL MARKETS, AND PROJECT LIFE: A CLARIFICATION. Journal of Financial & Quantitative Analysis, 719-730.
Lancaster, D., & Dowling, S. (2011). The Australian Semi-government. NA: RBA.
O 'Brien, G., Cunningham, R., Musgrave, A., Keeley, J., & Ricthie, D. (2012). Interest Rate Securities. NA: ASX Limited.
Phillips, V. (2012). Financial institutions, instruments & markets. North Ryde NSW: McGraw-Hill Australia Pty Ltd.
RBA. (2013, 8 7). In chart pack. Retrieved 8 18, 2013, from http://www.rba.gov.au: http://www.rba.gov.au/chart-pack/bond-issuance.html
S&P. (2013, 8 18). S&P Dow Jones Indices. Retrieved 8 18, 2013, from http://au.spindices.com: http://au.spindices.com/indices/fixed-income/sp-asx-corporate-bond-index
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