Chapter 2: Debt Securities

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Bondholders

have neither ownership interest in the issuing corporation nor voice in management

Funded Debt

corporate bonds with maturities of five years or more

Municipal Securities

debt obligations of state and local governments and their agencies. Most are issued to raise capital to finance public works or construction projects that benefit the general public

Coupon

the interest rate. Calculated from the bond's par value. Interest on a bond accrues daily and is paid in semiannual installments over the life of the bond. The final SEMIANNUAL interest payment is made when the bond matures, and it is combined with repayment of principal amount

Par/Face Value

normal $1,000 per bond, meaning each bond will be redeemed for $1,000 when it matures.

Maturity Date

the loan principal is repaid to the investor. The most common maturities fall in the 5-to-30-year range.

Term (Bond) Maturity

structured so that the principal of the whole issue matures at once. Because all of the principal is repaid at one time, issuers may establish a sinking fund account to accumulate money to retire the bonds at maturity

Serial (Bond) Maturity

schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid

Balloon (Bond) Maturity

uses elements of both serial and term maturities. The issuer repays part of the bond's principal before the final maturity date, as with serial maturity, but pays off the major portion of the bond at maturity

Series Issues

instead of placing all of its bonds in the hands of investors at one time, any bond issuer may spread out its borrowing over several years as it needs dictate by issuing the bonds in seperate series

Bond Certificates

Name of issuer
interest rate and payment date
maturity date
call features
principal amount
CUSIP number for identification
dated date
reference to the bond indenture

Bond Registration

record ownership should a certificate be lost or stolen

Coupon (Bearer) Bonds

kept no records of purchasers, and securities were issued without an investor's name printed on the certificate (not registered) anyone can claim interest, sell or redeem. No proof of ownership is needed to sell.

Registered Bonds

once issued, the issuer's transfer agent records the bondholder's name. Contain both interest and principal. Tranfer agent maintains a list of bondholders and updates the list a ownership changes. Interest payments are automatically sent to bondholders of record. Most Corporate bonds are issued this way.

Principal Only

(no longer issued) have the owner's name printed on the certificate, but the coupons are in bearer form. When sold, the names of the new owners are recorded, in order, on the bond certificates and on the issuer's registration record

Book-Entry

do not receive certificates. The transfer agent maintains the securities ownership records. The trade confirmation serves as evidence of book-entry bond ownership. Most US government bonds are available only in book-entry form

Denominations

Bearer Bonds- only in $1000 and $5000
Registered Bonds- $1000 or multiples of ($5k, 10k, 20k) up to $100,000 per certificate

Par

represents the dollar amount of the investor's loan to the issuer, and it is the amount repaid when the bond matures

Bond Quote

98 1/8 means 98 and 1/8% (98.125%) of $1000 or $981.25

Newspaper Quotes

One point is 1% of $1000 or $10. 1/4 point is $2.50

Basis Points

there are 100 basis points in each point. One basis point equals 1/100 or 1%

Basis for Bond Ratings

the amount and composition of existing debt
the stability of the issuer's cash flow
the issuer's ability to meet scheduled payments of interest and principal on its debt obligations
asset protection
management capability

Investment Grade (Bank-Grade Bonds)

must be a rating of BBB/Baa or higher to be suitable purchase by banks.

High-Yield Bonds

carry a speculative rating are suitable only for those with a high risk tolerance. They are characterized by greater returns coupled with greater credit risk

Rating to Yield Relationship

the higher a bond's rating, the lower its yield. Investors will accept lower returns on their investments if their principal and interest payments are safe. Bonds with lower ratings pay higher rates because of the risk to principal and interest associated with such uncertainties

Full Faith and Credit of US Government

the highest degree of safety:
US Treasury bills, notes and bonds
Series EE and HH bonds (savings bonds)

GNMA

Government National Mortgage Association
US Government backed

FFCB

Federal Farm Credit Banks
Second highest degree of safety

FHLMC (Freddie Mac)

Federal Home Loan Mortgage Corporation
Second highest degree of safety

FNMA

Federal National Mortgage Association
Second highest degree of safety

General Obligation Bonds (GO's)

backed by the taxing power of the issuer (municipality)
Third safest

Revenue Bonds

backed by revenues from the facility financed by the bond issue
Fourth safest

Corporate Debt

Secured Bonds (safest)
Debentures
Subordinated debentures
Income bonds (riskiest)

Liquidity

ease with which a bond or any other security can be sold. Synonymous with Marketability. Factors:
size of the issue
quality
rating
maturity
call features
coupon rate and current market value
issuer
existence of a sinking fund

Debt Service

the schedule of interest and principal payments due on a bond issue

Redemption

when a bond's principal is repaid
Terms in connection:
sinking fund
call
refunding
pre-refunding

Sinking Fund

facilitates the retirement of its bonds. The trust indenture often requires it, which can be used to call bonds, redeem bonds at maturity, or buy back bonds in the open market. Aids in the bond's marketability. To establish, the issuer deposits cash in an account with the trustee. Lower rated bonds typically est sinking funds

Call Feature

allows the issuer to redeem a bond issue before its maturity date, either in whole or in part (in-whole or partial calls). The bonds called in a partial call are selected by lottery or random

Call Premium

Issuer usually pays bondholders a premium because of the flexible financial management in issuing the right to call bonds for early redemption.
Call Premium = Call Price - Par

Callable Bond Benefits

-Interest rates decline, issuer can redeem bonds with higher interest rate and replace with lower rate
-Issuer can call bonds to reduce its debt anytime after the initial call date
-Issuer can replace short-term debt issues with long-term issues
-Issuer can call bonds as a means of forcing the conversion of convertible corporate bonds

Tendering

Issue does not have a call provision, the issuer can normally buy bonds in the open market to retire a portion of its debt

Call Risk

investors are faced with having to replace a high fixed-income investment with one that pays less

Call Protection Feature

advantage to bondholders in periods of declining interest rates

Call Trading

when bonds are called, a bondholder can turn in the bonds to the issuer on the call date or sell them in the open market at a discount

Refunding

the practice of raising money to call a bond. The issuer sells a new bond issue to generate funds to retire an existing issue. Can occur in full or in part.

Pre-refunding

(advance refunding) a new issue is sold at a lower coupon before the original bond issue can be called. An issuer pre-refunds a bond issue to lock in a favorable interest rate. A form of defeasance, or termination of the issuer's obligation. Typically highest rate, AAA or Aaa. Occurs when there is a call protection period

Pre-refunding Facts

-AAA rated
-they are considered defeased
-the funds are escrowed in government securities
-the marketability of the pre-refunded bond increases
-once pre-refunded, the issue is no longer considered part of the outstanding debt of the issuer

Puttable Bonds

in return for accepting a slightly lower interest rate, an investor receives the right to put, or sell, the bond to the issuer at full face value. Once the bond becomes puttable, the investor has the right to force the issuer to buy back the bond at par. *Most commonly found in Municipal bonds

Bond Yield

expresses the cash interest payments in relation to the bond's value. Determined by the issuer's credit quality, prevailing interest rates, time to maturity and call features

Nominal (Coupon) Yield

set at issuance and printed on the face of the bond. Is a fixed percentage of the bond's par value

Current Yield

measures a bond's coupon payment relative to its market price:
CY = Coupon Payment/ Market Price

Yield to Maturity

reflects the annualized return of the bond if held to maturity.
YTM = Annual Interest - (premium or discount/years to maturity)/ Average Price of the Bond
*Average Price of the Bond- is the price paid plus the amount received at maturity divided by two OR that price midway between the purchase price and par

Yield to Call

reflect the early redemption date and consequent acceleration of the discount gain or premium loss from the purchase price. For a premium bond called at par, YTC is always lower than the nominal yield, current yield and YTM. For a bond bought at a discount, YTC is always higher than the nominal yield, current yield, and YTM

Yield Rankings (Discount)

Lowest to Highest:
Nominal
CY
YTM
YTC

Yield Rankings (Premium)

Lowest to Highest:
YTC
YTM
CY
Nominal

Normal Yield Curve

as the term of the security increases, the yield increases. Occur during times of economic expansion- generally predicting that interest rates will rise in the future

Inverse Yield Curve

as the term of the security increases, the yield decreases. Occurs when the FRB has tightened credit in an overheating economy; it predicts that rates will fall in the future

Recession

if the yield curve spread between corporate bonds and government bonds is widening

Expansion

if the yield curve between corporate bonds and government bonds is narrowing

Secured Corporate Bond

when the issuer has identified specific assets as collateral for interest and principal payments

Mortgage Bonds

have the highest priority among all claims on assets pledged as collateral

Open-end indentures

permits the corporation to issue more bonds of the same class later. Subsequent issues are secured by the same collateral backing the initial issue and have equal liens on the liens on the property

Closed-end indentures

does not permit the corporation to issue more bonds of the same class in the future. Any subsequent issue has a subordinated claim in the collateral

Prior Lien Bonds

companies in financial trouble sometimes attract capital by issuing mortgage bonds that take precedence over first-mortgage bonds

Collateral Trust Bonds

issued by corporations that own securities of other companies as investments. A corporation issues bonds secured by a pledge of those securities as collateral.
Backed by:
-another company's stocks and bonds
-stocks and bonds of partially or wholly owned subsidiaries
-pledging company's prior lien long-term bonds that have been held in trust to secure short-term bonds
-installment payments or other obligations

Equipment Trust Certificates

notes and bonds that finance the purchase of capital equipment for railroads, airlines, trucking companies, and oil companies. Issued serially so that the amount outstanding goes down year to year in line with the depreciating value of the collateral. Title to the newly acquired equipment is held in trust until all certificates have been paid in full

Unsecured Bonds

have no specific collateral backing and are classified as either debentures or subordinated debentures

Debentures

backed by the general credit of the issuing corporation. Considered a general creditor. Below secured bonds and above subordinated debentures.

Subordinated Debentures

subordinated to the claims of the general creditors. Generally offer higher yields that either straight debentures or secured bonds because of their subordinate (riskier) status and they often have conversion features

Liquidation

-unpaid wages
-IRS
-secured debt
-unsecured liabilities
-subordinated debt
-preferred stockholders
-common stockholders

Guaranteed Bonds

backed by a company other than the issuer, such as a parent company. Increases the issue's safety

Income (Adjustment) Bonds

used when a company is reorganizing and coming out of bankruptcy. Pay interest only if the corporation has income to do so and the BOD declares it

Zero-Coupon Bonds

an issuer's debt obligations that do not make regular interest payments. Issued or sold at a deep discount to their face value and mature at par. Issued by corporations, muni's, and the US Treasury. Offer investors a way to speculate on interest rate moves. More volatile than traditional bonds; their prices fluctuate wildly with changes in market rates.
Tax: Investors will owe income tax each year on the amount by which the bonds have accreted

Trust Indenture Act of 1939

requires corporate bond issues of $5 million or more sold interstate to be issued under a trust indenture, a legal contract between the bond issuer and a trustee representing bondholders. The trust indenture specifies the issuer's obligation and bondholders' rights, and it identifies the trustee

Trustee

usually a bank or trust company. Monitors compliance with the covenants of the indenture and may act on behalf of the bondholders if the issuer defaults

Exemptions from Trust Indenture Act

Federal and municipal governments. *Municipal revenue bonds are typically issued with a trust indenture to make them more marketable

Protective Covenants

The debtor corporation agrees to:
-pay the interest and principal of its bonds
-specify where bonds can be presented for payment
-defend the legal title to the property
-maintain the property to ensure that business can be conducted
-insure the mortgage property against fire and other losses
-pay all taxes and assessments (property, income, and franchise)
-maintain its corporate structure and the right to do business

Closed-end Covenants

have senior claim on the underlying assets, even if the corporation issues other bonds secured by the same assets

Open-end Covenants

permits subsequent issues to be secured by the same property and have equal liens on it

NYSE (for bonds)

provides a central marketplace for trading corporate bonds. Most brokerage firms do not maintain regular floor brokers to execute bond orders; instead, the enlist bond brokers to execute the orders on their behalf. *Most corp bonds still trade in the OTC market

Convertible Bonds

corporate bonds that may be exchanged for a fixed number of shares of the issuing company's common stock. Pay lower interest rates than nonconvertible bonds and generally trade in line with the common stock

Convertible Securities Advantages to Issuer

-Marketability
-can be sold with a lower coupon rate than nonconvertibles because of the conversion feature
-can eliminate a fixed interest charge as conversion takes place, thus reducing debt
-because conversion normally occurs over time, it does not have an adverse effect on the stock price, which may occur after a subsequent primary offering
-by issuing convertibles rather than common stock, a corp avoids immediate dilution of primary earnings per share
-at issuance, conversion price is higher than market price of the common stock

Convertible Securities Disadvantages to Issuer

-when bonds are converted, shareholder's equity is diluted; that is more shares are outstanding, so each share now represents a smaller fraction of ownership in the company
-common stockholders have voice in the company's management; so a substantial conversion could cause a shift in the control of the company
-reducing corporate debt through conversion means a loss of leverage
-the resulting decrease in deductible interest costs raises the corporation's taxable income. Therefore, the corporation pays increased taxes as conversion takes place

Conversion Price

the stock price at which a convertible bond can be exchanged for shares of common stock

Conversion Ratio/Rate

expresses the number of shares of stock a bond may be converted into

Parity

two securities are of equal dollar value.
-Parity of common stock = market price of bond/ conversion ratio (# of shares)
-Parity price of convertible = market price of common x conversion ratio

Dilution

occurs when the percentage of ownership is lessened

Antidilution Covenant

found in the trust indenture. Requires an adjustment to the conversion price for stock splits, stock dividends, and the issuance of new shares

Forced Conversion

occurs when an issuer calls its convertible bonds and it is clearly in the best interest of bondholders to convert their bonds rather than let them be called away

Treasury Securities

*Regular way settlement is next business day

T-bills

short-term obligations issued at a discount from par. The return on a T-bill is the difference between the price the investor pays and the par value at which the bill matures.
-issued in denominations of $1,000 to $1 million
-have original maturities of 4, 13, and 26 weeks
-quote on a yield basis
-Zero-coupon securities
-book entry form

T-notes

-pay interest every six months.
-Sold at auction every four weeks
-issued in demoninations of $1,000 to $1 million
-mature in 2-10 years
-mature at par
-T-note refunding- the government offers the investor a new security with a new interest rate and maturity date as an alternative to a cash payment for the maturing note
-book entry form

T-bonds

-long-term securities (10 to 30 years in original maturity) that pay interest every six months
-issued in dominations of $1,000 to $1 million that matured in more than 10 years from issuance
-book entry form

Treasury Receipts

-type of zero-coupon bond
-B/D buy Treasury securities, place them in a trust at a bank and sell separate receipts against the principal and coupon payments
-the Treasury securities held in trust collateralize the Treasury receipts
-not backed by the full faith and credit of the US government

STRIPS

Separate Trading of Registered Interest and Principal of Securities
-Treasury issues that are suitable for stripping into interest and principal components
-zero-coupon bonds
-backed in full by the US government

TIPS

Treasury Inflation Protection Securities
-helps protect investors against purchasing power risk
-not issued with a fixed interest rate, but the principal is adjust semiannually by an amount equal to the change in the CPI (standard measure of inflation)
-exempt from state and local income taxes on the interest income generated, but subject to federal taxation

GNMA

supports the Department of Housing and Urban Development
-*issued in minimum denominations of $25,000
-monthly interest and principal payments
-taxed at all levels
-pass-through certificates
-significant reinvestment risk

FHA

Federal Housing Administration
-backed by full faith and credit of the government

VA

Department of Veteran Affairs
-backed by full faith and credit of the government

Prepayment Risk

the risk that the underlying mortgages will be paid off earlier than anticipated. Usually occurs when interest rates fall

Extended Maturity Risk

the risk that the underlying mortgages will remain outstanding longer than anticipated. Occurs when interest rates rise

Farm Credit System (FCS)

national network of lending institutions that provide agricultural financing and credit.
-Privately owned, government sponsored enterprise that raises loanable funds through the sale of FCS to investors
-Made available to farmers through a nationwide network of eight banks and 225 Farm Credit lending institutions
-issue discount notes, bonds, and master notes
-maturities range from one day to 30 years
-proceeds are used to provide farmers with real estate loans, rural home mortgage loans and crop insurance

Freddie Mac

created to promote the development of a nationwide seconday market in mortgages by buying residential mortgages from financial institutions and packing them into mortgage-backed securities for sale to investors
-income subject to federal, state and local income taxes
-Denominations: $5k, $25k, $100k, $500k, and $1 mill
-interest is paid semiannually
-book entry form

Pass-through

the mechanism of passing homebuyer's interest and principal payments from the mortgage holder to investors
Two types:
-Mortgage Participation Certificates (PCs)- make principal and interest payments once a month
-Guaranteed Mortgage Certificates (GMCs)- make interest payments twice a year and principal payments once a year

Competitive bids

those place by primary dealers (JPM,BOA) in US government securities
-made in yield, not dollar
-not always filled

Noncompetitive bids

placed by other market participants: smaller banks and broker/dealers, insurance companies, and individuals
-Stop out price: the lowest accepted competitive bids
-always filled

Dutch Auction

the highest bid (lowest yield) is accepted first and on down the line. The lowest accepted bid is the stop out price

Dated Date

the date from which the actual accrual begins

Accrued Interest (Corp/Muni)

-30/360
-Principal x interest rate x elapsed days / 360 days = accrued bond interest
-T + 3
-start with day one
-bond interest accrues up to, but does not include, settlement date

Accrued Interest (US Gov Bonds)

-Actual calendar days/365
-T + 1
-start with day one
-bond interest accrues up to, but does not include, settlement date

Trading Flat

used to describe a situation in which a bond trades without accrued interest
-Zero-coupon Bonds, Income Bonds

Collateralized Mortgage Obligation (CMO)

-type of asset-backed security: one whose value and income payments are derived from or backed by a specific pool of underlying assets
Classes
-principal only
-interest only
-planned amortization
-targeted amortization class
Characteristics:
-the rate of principal repayment varies
-if interest rates fall and homeowner refinancing increases, principal is received sooner than anticipated (prepayment risk)
-if interest rates rise and refinancing declines, the CMO investor may have to hold his investment longer than anticipated
-yield more than Treasury securities and normally pay investors interest and principal monthly
-subject to federal, state, and local taxes
-relatively liquid
-denominations: $1,000

Tranches

a pool of mortgages that's structured into maturity classes

Plain Vanilla CMO

pays interest on all tranches simultaneously

Series EE Bonds

-nonmarketable (no 2nd market)
-issued at 50% of their face value and reach final maturity 30 years from issuance
-Semiannual interest payments
-buying and selling is between investors and commercial banks
-Designed to reach face value approx. 17 years, but can hold up to 30
-Rate of interest is recomputed every 6 months at 90% of the averahe 5 year Treasury yield for the preceding 6 months

Series HH Bonds

-issued at face value and pay interest every six months at a fixed rate
-are current income securities
-no longer being issued

Series I Bonds

-designed for investors seeking to protect the purchasing power of their investment and earn a real rate of return
-accrual security- interest is added to the bond monthly and paid when the bond matures or is redeemed
-sold at face value, grow in value with inflation-indexed interest for up to 30 years
-Interest: combo of two separate rates- a fixed rate and a variable semiannual inflation rate (based on CPI)
-interest is state and local tax exempt
-Federal income tax can be deferred for up to 30 years

CMO's (Test Facts)

-not backed by the US government; they are corporate instruments
-interest paid is taxable at all levels
-backed by mortgage pools
-yield more than US Treasury securities
-considered relatively safe but are subject to interest rate risk
-issued in $1000 denominations and trade OTC
-PACs have reduced prepayment and extension risk
-TACs are protected against prepayment risk but not extension risk
-PACs have lower yields than comparable TACs

Capital Market

-serves as a source of intermediate-term to long-term financing, usually in the form of equity or debt securities with maturities of more than one year

Money Market

-provides short-term funds to coporations, banks, broker/dealers, and the US government
-debt issues with maturities of one year or less
-fixed-income securities with short-term maturities, typically one year or less
-high degree of safety
Securities include:
-Treasury bills
-repurchase agreements (repos)
-reverse repurchase agreements
-banker's acceptances (time drafts)
-commercial paper (prime paper)
-negotiable certificates of deposit
-federal funds

Repurchase Agreement (Repo)

-financial institution (bank, b/d), raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at a later date
-basically conduct a sale and repurchase later
-Repo contract includes repurchase price and maturity date
-if agreement sets specific date, considered a fixed agreement
-Open repo: the maturity date is left to the initial buyer's discretion and becomes a a demand obligation callable at any time
-interest on loan is the difference between the sale price and the repurchase price
-the loan's interest rate (repo rate) is negotiated between the two parties and is generally lower than bank loan rates
-if dealer defaults, lender can sell in 2nd market
-subject to interest rate risk

Reverse Repurchase Agreement

-a dealer agrees to buy securities from an investor and sell them back at a higher price

Banker's Acceptance (BA)

-short-term time draft with a specified payment date drawn on a bank (basically a post dated check or line of credit
-payment date is normally between 1 and 270 days
-Corp's use to finance international trade; typically pays for goods and services in a foreign country
-used as collateral against FRB loans
-sold at a discount and mature at par
-quoted in yield

Commercial Paper (promissory notes)

-raise cash to finance accounts receivable and seasonal inventory gluts
-interest rates are lower than bank loan rates
-maturities range from 1 to 270 days; most mature within 90 days and issued in book-entry form
-sold at a discount and matures at par; quoted in yield
-companies with excellent credit issue CP
-buys are money market funds, commercial banks, pension funds, insurance companies, corporations, and nongovernmental agencies

Direct Paper

-commercial paper sold by finance companies directly to the public without the use of dealers
-General Motors Acceptance Corp (GMAC) is a well known issuer
-high quality commercial paper is sometimes called prime paper

Dealer Paper

commercial paper sold by issuers through dealers rather than directly to the public

Certificates of Deposit (CDs)

-banks issue and guarantee CDs with fixed interest rates and minimum face values of $100,000 ($1 million or more are more common)
-some can be traded in 2nd market
-insured by the FDIC up to $100,000

Nonnegotiable CDs

-NOT traded in the 2nd market and are not money market securities

Negotiable CDs

-time deposits that banks offer
-an unsecured promissory note guaranteed by the issuing bank
-most mature in one year or less
-accrued interest is included in the price
-can be traded in the 2nd market

Brokered CDs

-sold by broker/dealers directly to customers
-a b/d buys a master CD from a bank and then subdivides the CD into smaller pieces for resale to customers
-have a maturity of several years and sometimes carry a higher yield
-if a customer wishes to sell a CD before maturity, cannot be redeemed by bank, but must be sold in 2nd market (may result in a loss of principal)
-subject to call risk and risk that FDIC will not apply due to the issuer/customer relationship not being there

Step-Up or Step-Down CDs

-have a fixed interest rate for a period of time, usually but not limited to one year, and then adjucted up or down

Federal Funds Rate

-the rate the commercial money center banks charge each other for overnight loans of $1 million or more
-considered a barometer of the direction of short-term interest rates
-most volatile rate in the economy due to the rate changing daily in response to the borrowing banks' needs
-NOT set by the Federal Reserve

Prime Rate

-the interest rate that large US money center commercial banks charge their most creditworthy corporate borrowers for unsecured loans
-the prime rate changes when banks react to changes in FRB policy
-lower rate when FRB eases money supply, raise rate when FRB contracts the money supply

Broker Loan Rate (Call Loan or Call Money Rate)

-the interest rate banks charge broker/dealers on money they borrow to lend to margin account customers

CD Rate

-rate is the bank rate offered on nonnegotiable CDs
-considered the least volatile

Discount Rate

-the rate the Federal Reserve charges for short-term loans to member banks
-set by Federal Reserve
-indicates the direction of the FRB monetary policy
-Decreasing rate indicates an easing of FRB policy; increasing rate indicates a tightening of FRB policy

Commercial Paper Rate

-rate on commercial paper placed directly by finance companies or the rate on high-grade unsecured notes that major corporations sell through dealers

Eurodollars

-US dollars deposited in banks outside the United States; the deposits remain denominated in US dollars rather than the local currency
-bearer form
-NOT subject to withholding tax
-Pay in US dollars

London Interbank Offered Rate (LIBOR)

-European banks lend eurodollars to other banks in much the same way that US banks lend federal funds
-interest rates are based on the LIBOR

Eurobond

-any long-term debt instrument issued and sold outside the country of currency in which it is denominated
-Eurodollar bond: a US dollar-denominated eurobond, a bond issued and sold outside the US, but for which the principal and interest are stated and paid in US dollars
-US government does NOT issue eurobonds
-NOT subject to withholding tax
-bearer form

Interbank Market

-developed as a means of transacting business and trading, lending, and consolidating foreign currency deposits
-unregulated, and decentralized international market
-Two types of trades: spot trades/cash market/spot market (settle and are delivered in 1 or 2 business days) or forward trades (settle later than spot, generally months in the future)

Exchange Rate

-the rate at which one currency can be converted into another
-fluctuate daily

Yellow Sheets

-where dealer quotes for corporate bonds

Trade Reporting and Compliance Engine (TRACE)

-FINRA approved trade reporting system for corporate bonds trading in the OTC secondary market
Rules:
-both sides of the transaction must report
-trades must be reported within 15 min of execution or deemed to be late
-execution date, time of trade, quantity, price, yield, and if price reflects a commission charged are all reportable and displayed
Exclusions:
-Foreign country and government sponsored debt
-mortgage and asset-backed securities
-collateralized mortgage securities
-money market instruments
-municipal securities
-convertible corporate securities

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