Debt

sls (sales)

"Sls" are the sales for the day - in this case 12. This means that 12 bonds changed hands. Unlike stock trades, which are listed in lots of 100, the actual number of bonds traded that day is shown. This can be done because trading volume is very small in both corporate and municipal bonds.

Yield To Maturity

(Annual Income [+ Annual Cap Gain or - Annual Cap Loss])/((Purchase Price + Redemption Price / 2))

Liquidation

, secured bondholders are paid first; then unpaid wages and taxes; then debenture holders; then subordinated bondholders; then preferred stockholders; and finally, common stockholders.

Dollar Bonds

. Municipal dollar bonds are term issues that are quoted on a dollar basis. They are usually part of large combined serial and term bond offerings made by municipal issuers. These bonds are traded in the secondary market. Only serial bonds are quoted on a yield basis - dollar bonds, as their name implies, are quoted on a dollar price basis.

Mill rate

.001 Paid on ASSESSED value Example of question: A customer lives in a municipality with a 7mill tax rate on assessed valuation of 300,000 on a market value of 450K. What is the tax liability? Answer: 300K * .007 = 2100

Step Down CD

A "step-down" CD is one that starts with a high introductory "teaser" interest rate that is higher than the market rate at that moment. Then the rate "steps down" to the market rate of interest at a specified date or at specified intervals.

Bankers Acceptance

A Banker's Acceptance is a draft on a bank, payable at a future date (typically 30-90 days in the future). These are essentially "post dated" checks that are used to finance imports and exports. BAs trade at a discount to face; and mature at face; with the difference being the interest earned.

Repurchase Agreement

A Repurchase Agreement is typically an overnight agreement where a government securities dealer sells part of its inventory overnight (to get cash) to another dealer; the other dealer earns interest on a 1 day loan. The next day, the repurchase agreement is closed-out with the return of the securities at a slightly higher price (the difference is the interest earned)

Double Barreled

A double barreled revenue bond is a revenue bond that is also backed by ad valorem taxing power.

Firm Quote

A firm quote is one that will not be changed for a specified time period; and one which the dealer will honor during that time period.

Moral Obligation Bond

A moral obligation bond is issued when the issuer cannot use conventional financing because its credit is too shaky. A moral obligation bond obligates a local issuer to pay, but also has the moral obligation of the State legislature to apportion the funds necessary to pay the debt if the local issuer cannot. The State legislature is morally obligated to pay if the local issuer cannot; but is not legally obligated to pay.

Net Revenue Pledge

A net revenue pledge requires that the issuer pay operation and maintenance first. After paying operating and maintenance, from the remaining net revenues, the bondholders are paid their annual debt service requirements. After paying debt service, the issuer can fund the debt service reserve, and operations and maintenance reserve, accounts.

Nominal Quote

A nominal quote is really no quote - it is simply an approximation of a price.

Special Assessment Bond

A special assessment bond issue pays for a municipal improvement, where only those who benefit from the improvement are assessed additional taxes to pay.

Workable

A workable is a likely price at which a dealer will buy bonds - note that the bid is not "firm." A municipal dealer who wishes to sell will collect a number of workables to find the best price in the market. After "shopping around," the selling dealer will go back to the dealer with the best workable to nail down a final firm price at which to sell.

Accrued Interest

Accrued interest for U.S. Governments is computed on an actual day month / actual day year basis; for agencies and everything else - is computed on a 30 day month / 360 day year basis. Accrued interest is added to both the buyer and sellers confirmation

Agency Issues

Agency issues include: Housing: - Federal Home Loan Banks - Government National Mortgage Association - Federal National Mortgage Association - Federal Home Loan Mortgage Corporation Farmers: - Federal Farm Credit Funding Corporation College Loans: - Student Loan Marketing Association

Munis - Legal Opinion

All new municipal issues must have a legal opinion, given by a bond attorney (the "bond counsel"). Validity Legality Tax Exempt status unqualifed means no problems

CMO

All tranches receive a monthly interest payment; but the tranches are retired sequentially, creating a sequence of maturities. CMOs have a serial structure (serial = serial maturities = a sequence of maturities) CMOs have almost no default risk (since the underlying securities are agency issues) - they are rated the highest investment grade - "AAA."

ETN

An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. Thus, if the bank's credit rating is lowered, the value of the ETN will fall as well - so it has credit risk.

Current Yield

Annual Income / Market Price = Current Yield As bond prices fall, the current yield rises. As bond prices rise, the current yield falls.

Bonds subject to AMT

Any Munis that would be serving a private purpose such as a sports area and a convention center.

Treasury Bills

BId - Ask in yield

BANs

Bond Anticipation Notes

Call Occurrence

Bond Basics: Call Occurrence Issuers call in debt because: Interest rates have dropped substantially after issuance, allowing the issuer to refinance the issue at lower current rates; or Mandatory call provisions in the call contract obligate the issuer to call in bonds under stated circumstances; or The issuer has excess funds that it cannot reinvest profitably, so it use

Trading Flat

Bonds that trade without accrued interest (trading "flat") are: - Defaulted bonds - Income bonds - Zero-Coupon bonds - Trades of bonds where the trade settles on the semi-annual interest payment date

Bond Risks

Call Risk Credit Risk Interest Rate Risk / Marker Risk (Not for Putable Bonds) Purchasing Power Risk: If inflation rates increase, interest rates increase as well. If interest rates increase, bond prices fall - this is purchasing power risk.

Ginnie Mae Overview

Certificates representing $25,000 face amount of the "pool" are sold to the public as "mortgage backed pass through certificates." The monthly mortgage payments are passed through to the certificate holders. GNMA is directly backed by the U.S. Government; GNMA interest is taxable at the Federal, State and Local levels.

Primary Dealers

Commercial Banks, US Broker Dealers, Foreign Broker Dealers, Foreign Banks

Commercial Paper

Commercial paper is a short term, unsecured corporate debt, with a maximum maturity of 270 days. Commercial paper is an exempt security under the Securities Act of 1933, and is sold without a prospectus, as long as its maturity does not exceed 270 days.

Construction Loan Notes

Construction Loan Notes are issued to construct a municipal building; when the building is complete, the proceeds from a long-term bond sale are used to retire the notes. Unlike other municipal short term notes, which are very short term, these notes generally have a 2 - 3 year life.

Corporate Bond Quotes

Corporate bonds are generally term bonds, quoted on a percentage of par basis. Corporate bonds are quoted as a percentage of $1,000 par in fractions of 1/8ths.

Credit Default Swap

Credit Default Swap (CDS), the buyer pays a premium to the seller, where the seller agrees that if the reference loan defaults, the seller will pay the face amount of the loan to the buyer. The buyer pays an annual "insurance-like" premium for this. If the loan does not default, the seller wins - collecting the premiums without having to make a payout. If the loan does default, the buyer wins - since the seller must pay the buyer the face amount of the loan in cash.

Muni Bond Risks

Credit risk Market risk Marketability risk Liquidity risk Purchasing power risk Legislative risk

Debenture Bonds

Debentures are a long term unsecured corporate debt. Debentures can be convertible into the common stock of the issuer - in contrast, secured corporate bonds are never convertible.

Equipment Trust Certificate

Equipment trust certificates are a secured bond. The bond is secured by a lien on equipment used by the issuer, typically airplanes, railroad cars, and trucks.

Eurodollar

Eurodollar bonds are dollar denominated bonds issued outside the United States. Purchasers of Eurodollar bonds must reside outside the United States. The securities are not registered with the SEC; and are issued in bearer form. Interest is paid annually on the securities. U.S. issuers of Eurodollar bonds are not subject to currency exchange risk, since the bonds are paid only in U.S. Dollars. U.S. Corporations Foreign Corporations U.S. State Governments Foreign Governments

Sinking Fund

For municipal bond issues, a separate account where periodic deposits are made by the issuer to meet required debt service payments of both interest and principal.

Funded Debt

Funded debt is long term corporate debt, typically with at least a 5 year life.

G.O. Bond Analysis

G.O. bonds of political subdivisions are paid from collected ad valorem taxes. To analyze the debt, the following are evaluated: Trend of assessed values in the community; Population trend in the community; Attitude of the community towards its debt (meaning does the town have a group of solid citizens will repay the debt, even if times become difficult); and the Ability of the community to collect taxes assessed. Ratios that are evaluated are: Debt per Capita; Debt to Assessed Value of property; Taxes Collected to Taxes Assessed.

Capital Appreciation Bond

GO Bonds offered at a deep discount (allows the muni t escape debt limits.) It is on the balance sheet at its discount value

G.O Bonds

General Obligation bonds are backed by the faith, credit and unlimited taxing power of the issuer. They are issued by municipalities to build non self-supporting projects such as schools, municipal buildings, roads, etc.

US Government Quotes Spread

Government securities dealers publish "bid - ask" quotes. Example: A dealer quotes a $1,000 par 30-yearTreasury Bond at 99-16 Bid - 99-24 Ask. The "spread" between the bid and ask quote is 8/32nds = 1/4 point = $2.50 per $1,000 par bond. Active trading markets, such as the government market, are characterized by large trading volumes and narrow spreads.

Construction Loan Notes

I The use of CLNs allows the municipal issuer to reduce its interest cost when constructing a new facility II The maturity of CLNs is generally 3 - 5 years III Accrued interest on CLNs is computed on an actual day month / actual day year basis, as will other short term notes.

Firm Offer with Recall

If a recall is added to the firm offer, e.g., a 5 minute recall, the selling dealer is adding to the offer the stipulation that he reserves the right to call any time during the 1/2 hour, and demand that a purchase decision be made within the next 5 minutes.

Taxation of Non accretion

If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).

Income / Adjustment Bonds

Income bonds (also known as adjustment bonds) are only required to make interest payments if the corporation earns a specified level of income; otherwise there is no obligation for the issuer to pay. if a payment is made, the amount received is the stated rate of interest on the bond.

Industrial Revenue Bond

Industrial Revenue bonds are also called Industrial Development bonds. IDBs are used to build a plant to be rented to a corporate user that will bring jobs to the area. The revenue source is the lease payments made by the corporation. The corporation unconditionally guarantees the bond. These are private purpose bond issues, which are currently taxable.

covenant of defeasance

Issuer will take advantage of this covenant if interest rates have dropped and the issue is not currently callable. To advance refund the issue, the issuer buys enough U.S. Government securities to meet the debt service requirements on the issue and places then in escrow with a trustee. The maturity on the U.S. Governments matches the maturity (or first call date) of the outstanding bonds. The interest payments received from the U.S. Governments are used to meet the debt service requirements. When the U.S. Governments mature, the proceeds are used to retire the issuer's debt. By advance refunding, the issuer removes the existing debt as its own liability, freeing it to issue new debt at lower current interest rates.

Bond Price Changes that result from IR Movements

Long term bond prices are more volatile than short term bond prices as interest rates move. Thus, short term bond prices are more stable (move more slowly) as interest rates change compared to long maturities.

Long Term Negotiable CDs

Long term negotiable CDs: accrue interest and pay semi-annually; are subject to reinvestment risk because of their longer maturity and semi-annual payment of interest; are subject to market risk because of their longer maturity; can be variable rate (a step-up or step-down CD); can be callable.

What kind of bond has more volatile price movements?

Low coupon issues will have more volatile price movements and more of the PV is in the last payment. Long Bonds with Low coupons Bonds trading at a discount have more volatile price movements than premium bonds.

Money Market

Money market instruments are defined as unsecured debts with 1 year or less to maturity.

Corporate Debt Summary

Most corporate bonds trade over-the-counter, though there is very limited trading on the NYSE. Long term bonds are quoted on a percentage of par basis in 1/8ths. Commercial paper is quoted in terms of yield. Corporate bonds are term issues, with the exception of equipment trust certificates, which are serial issues.

Z Tranche in Rising Rates

Most risky. Get's paid last. This is a zero coupon trance. Value goes up in rising rate environments because people will take longer to pay their mortgages so there is more change for extra money to go into the z tranche.

VRDOs

Municipal VRDOs (Variable Rate Demand Obligations) were the first attempt by municipal issuers to sell long term bonds at short term rates (and short term rates are typically lower!). A municipal variable rate demand note is a municipal bond that gives the holder the right to "put" the bond to the issuer at par, typically at the interest payment dates. The interest rate is reset, usually weekly, to an indexed rate, and thus, will vary. It is called a "note" because the actual maturity is unknown - the holder, in effect, can redeem at par whenever he or she wants. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

Municipal Bond Quotes

Municipal bonds are generally serial bonds, quoted on a yield basis. Example: A 6% coupon rate municipal bond is quoted on a 6.50 basis. This means that the dealer is discounting the price below par to raise the effective yield to 6.50%.

Dollar Quotes

Municipal term bonds are called dollar bonds, because they are quoted on a dollar price basis. They are quoted percentage of par in 1/8ths, similar to corporate bonds.

Net Overall Debt

Net Direct Debt + Overlapping Debt

Debt To Value

Net Overall Debt / Assessed Value of Property

Yield Curve Summary

No matter what the shape of the yield curve, the following statements are true: Long term bond prices are more volatile than short term bond prices in response to market interest rate changes. Short term interest rates are more volatile than long term interest rates.

Muni Bond Insurance

Only covers investment grade bonds and insures TIMELY payments (no lump sums, etc) AMBAC , MBIA, FGIC, FSA

Parity Bond Price

Parity is the price at which the convertible bond and the common stock both have equivalent value. MKT Value X Conversion Ratio = Parity Price of Bond

Companion Tranches

Plain vanilla tranches" can be subdivided into a "PAC" (Planned Amortization Class) and a "Companion Tranche." Principal payments that come in earlier than expected are applied to the Companion prior to payments being applied to the PAC; principal payments that come in later than expected are applied to the PAC prior to being applied to the Companion. The PAC is relieved of prepayment and extension risk; while these risks are loaded into the Companion tranche. The PAC is given the more certain repayment date; while the Companion is given the least certain repayment date.

Revenue Bond Ratio Test

Pledged Revenues / Debt Service Requirements

Defeasance

Pre refunding with US Government securities and rarely Bank certificates of deposit

STRIP Risks

Purchasers of STRIPS assume a huge level of purchasing power risk. Because these are long-term zero-coupon obligations, if market interest rates rise due to inflation, STRIPS prices collapse. However, as long as they are held to maturity, this is not an issue, since they are redeemed at par. Treasury Receipts are long term zero-coupon U.S. Government bonds created by broker-dealers who have bought regular Treasury Bonds/Notes and who have "stripped" them of coupons.

US Government Trading

Regular way trades of U.S. Government securities settle in Fed Funds the next business day. Both governments and agencies are quoted in 32nds. Both governments and agencies are exempt securities under Federal law, meaning they are not required to be registered with the SEC. Accrued interest for U.S. Governments is computed on an actual day month / actual day year basis; accrued interest for agencies is computed on a 30 day month / 360 day year basis.

Reinvestment Risks

Reinvestment risk is the risk that interest rates drop after the issuance of a bond, and the semi-annual interest payments received from a bond are now reinvested at lower current market rates. Thus, the overall rate of return on the investment is reduced.

RTRs

Reports Bond Trades

RANs

Revenue Anticipation Notes

Revenue Bonds

Revenue bonds are a self-supporting debt that is backed by the revenues from some enterprise activity, such as a toll bridge, toll road, water authority or sewer authority. Because they are self-supporting, revenue bonds are not subject to debt limits. To justify the issuance of revenue bonds, a feasibility study must be performed.

Cash management bills

Short Term t-bill with no regular schedule for auction. Only issued when the government needs money immediately.`

Structured Products

Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies.

TRACE

TRACE is FINRA's Trade Reporting and Compliance Engine. It reports trades of corporate bonds and agency bonds (but not U.S. government bonds). Any OTC dealers trading these bonds must report each trade to TRACE within 15 minutes. TRACE disseminates the trade report immediately. Dealers have 15 minutes to report because FINRA requires a lot of detail in each trade report.

TANs

Tax Anticipation Notes

Collection Ratio

Taxes Collected / Taxes Assessed

Bond Quotes

Term issues are quoted on a percentage of par value (bonds have a standard $1,000 par value). Term bonds are also called "dollar bonds," since a percentage of par value quote is the same as a dollar quote. Serial bonds are quoted on a yield to maturity basis, known as a "basis" quote.

Junk Bonds

The "junk" ratings are: Moody's: Ba or lower Standard and Poor's: BB or lower

Fed and Repos

The Federal Reserve enters into repurchase agreements with government securities dealers to loosen credit availability. The Federal Reserve will buy government securities from a primary bank dealer (giving the bank dealer cash to lend out); with an agreement to sell back the securities the next day.

Fed and Reverse Repo

The Federal Reserve enters into reverse repurchase agreements with government securities dealers to tighten credit availability. The Federal Reserve will sell government securities to a primary bank dealer (draining the bank dealer of cash to lend out); with an agreement to buy back the securities the next day.

Nominal Yield

The nominal yield is the stated rate of interest, or coupon rate, on the bond.

Short Term Note

The notes generally very short term, and are used to "bridge" a short term cash need.

Trust Indenture

The trust indenture appoints a trustee to oversee the adherence of the issuer to all of the promises made by the issuer to the bondholders in the bond contract. it must be financially big enough to insure that the issuer cannot exert influence over it. Thus, the appropriate choices are a Bank or a Trust Company. Corporate Debt and revenue bonds

Corporate Debt Summary

The types of corporate bonds are: Secured bonds: Mortgage bonds Equipment trust certificates Collateral trust certificates Unsecured bonds: Debentures (convertible or non-convertible) Income (Adjustment) bonds

PO CMO in Rising Rates

The value will go down because it will take a longer time to get your principal back. People will not be inclined to refinance, etc.

Net Return for comparing portfolios

This one is "interesting." The "default risk" represents the loss of return that is likely due to making higher risk investments. If Portfolio A has an expected annual rate of return of 10% over 10 years; but there is the probability that of the $2,000,000 invested, 5% of those bonds will default, so the net return will be 95% of 10% = 9.5%.

Dealer Profit

To get an approximation of price of a bond quoted on a yield basis, divide the coupon by the basis. Note that this only works for long term bonds.

Trade Settlement

Trades of Government and Agency securities settle in "Fed Funds" - funds payable at a Federal Reserve Bank, Trades of corporate securities settle in "Clearing House Funds" - funds payable at NSCC - National Securities Clearing Corporation.

TIPS

Treasury Inflation Protection Securities - are long term bonds that do not have this risk. Each year, the principal amount is adjusted upwards by that year's inflation rate. At maturity, the bondholder receives the greater inflated principal amount or par. This is in addition to the semi-annual interest payment received. There really are 2 components to the return offered by a TIPS - the coupon rate and that year's inflation rate. Lower yield than similar securities

US Government Bond Quotes

U.S. Government bonds are generally term bonds, quoted on a percentage of par basis. U.S. Government bonds are quoted as a percentage of $1,000 par in fractions of 1/32nds. Example: A U.S. Government bond quoted at 99-4 is priced at = 99 4/32nds% = 99.125% of $1,000 par = $991.25.

US Government Risks

U.S. Government securities have the lowest credit risk; federal agency issues have slightly higher credit risk. U.S. Government and agency securities do have market (interest rate) risk, however. U.S. Government and agency securities have almost no liquidity risk, no marketability risk. Call risk does not exist for Treasury Bonds, since they are non-callable. Prepayment risk exists for GNMA, FNMA and FHLMC pass-through certificates if interest rates drop. Extension risk exists for these securities if interest rates rise.

Yield Comparisons Discount

When a bond trades at a discount, the 3 yields, from lowest to highest are: Nominal Current Yield To Maturity Yield To Call

Yield Comparisons Premium

When a bond trades at a premium, the 3 yields, from lowest to highest are: Yield To Call Yield To Maturity Current Nominal

CMO in Rising Rates

When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster.

Yield Curve

Whether the yield curve is ascending (normal), flat or descending, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities. Short Term Rates always more volatile then long term

Auction Rate Securities

Why did they fail? - There were no buyers at auction in a panicked market - B/c anyone who did bid did so at ridiculous prices that no transaction could happen

GANs

[Federa] Grant Anticipation Note

Special Tax Bond

special tax bond is a type of bond backed by taxes other than ad valorem taxes - usually excise taxes such as tobacco, alcohol, and gasoline.

IOs are counterintuitive

with an IO, when interest rates rise, prices rise! This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. Because interest will now be paid for a longer than expected period, the price rises