Supranational organizations sources of repayment proceeds...a bit confused

CFA Level I
#1

Not sure I understand this line in the book in the fixed income section (reading 51). Under sources of repayment proceeds it states that one source of repayment for bonds issued by supernational organizations is the repayment of previous bonds issued by the organization.

How exactly does paying off other loans service the debt of other bonds? If these organizations pay off previous loans doesn’t this decrease their sources of proceeds? Or are you supposed to look at it from the perspective of being bumped up in the pecking order since there are less bonds senior to the others?

#2

Not only these supernational orgs, e.g. World Bank, IDB,etc, but private corporations do use new debt issue to pay for the old debt - this is called “roll-over” of the debt. In asset-backed commercial paper market, corporations usually do not have to worry about the principal payment on the ABCP when it comes due, instead,the corp just issues a new ABCP that replaces the old one.This is no longer the case after the financial crisis. But these supernational orgs usually have the highest sovereign credit rating at AAA and the default rate at World Bank (as far as I know from my past work experience in IBRD) was ZERO - as WB is always the lender of last resort and none of these developing countries would dare to risk losing this one.

#3

You’re talking about issuing new debt. The original post referred to repayment of old debt.

I think that there’s something wonky in the original post; you cannot generate a source of repayment by repaying something else.

Maybe check to see if there’s an erratum.

#4

Now I re-read the original post and agree that there must be something wrong with the statement or it may be interpreted in another way.

#5

Yeah I reread it multiple times. And the line I’m referring to was pretty much copied out of the book verbatim. Only correction is that it was in reading 52. Nothing mentioned in the errata. Oh well. Thanks guys.

#6

I’m stuck on the same conundrum in 2019. There’s even a question about it in an exercise >

Generally, the source of repayment for bonds issued by supranational organizations is either the repayment of previous loans made by the organization or the paid-in capital from its members.

(Institute 304)

Institute, CFA. 2016 CFA Level I Volume 5 Equity and Fixed Income. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

#7

This is completely different from the original post.

Reread what you wrote: repayment of previous loans made by the organization.

This is lending by the organization, not borrowing. If you lend money to someone else, then when they repay you, you can use that money to repay someone who lent money to you.