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?
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.
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.