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Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
Bond Basics Seminar
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Bond Basics Seminar

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Another seminar based on the book "Figuring Out Wall Street. Bond Basics provides a quick overview of how corporate bonds are used for financing the needs of business.

Another seminar based on the book "Figuring Out Wall Street. Bond Basics provides a quick overview of how corporate bonds are used for financing the needs of business.

Published in: Economy & Finance, Business
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  • its just a wonderful presentation.... thanks a lot
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  • If you enjoyed this presentation on Bond Basics, look for the newer Fixed Income Investing Seminar presentation. It is a more extensive coverage of the topic. Available from my channel, http://www.slideshare.net/FloydSaunders/fixed-income-investing-seminar.
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  • Really enjoyed the Bond Basics Seminar...thank you for a great presentation.
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  • 1. The Beginning Investor Series. Overview of BondsCovering Chapter Nine of Figuring Out Wall Street Saunders Learning Group, LLC May 2012
  • 2. Training from Saunders Learning Group Saunders Learning Group provides a variety of training programs, workshops and seminars targeted to the financial services industry. Programs are available in a wide range of topics, and we are specialists in developing custom programs that are targeted to your needs. Contact the founder, Floyd Saunders at 316-680-6482 or at floyd@floydsaunders.com for more information. Saunders Learning Group, LLC, Andover, KS2
  • 3. All About Figuring Out Wall Street ... Everything has changed in the financial services industry and it affects your financial well-being. From bank failures, to record unemployment, home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone from first time investors to veterans of banking understand what to do to persevere and restore our faith in our financial systems.Published by Saunders Learning Group.Training for financial professionals and consumers. If your interest is financial turn toSaunders Learning Group for your training needs.Contact information: email: floyd@floydsaunders.com mobile: 316-680-6482 Saunders Learning Group, LLC, Andover, KS 3
  • 4. What is a Bond? In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals. “Gentlemen prefer bonds. “ – Andrew MellonSaunders Learning Group, LLC, Andover, KS
  • 5. Introduction This presentation is designed to give participants information that will enhance their understanding of bonds, how they are issued, how to invest in them and how they are redeemed.Saunders Learning Group, LLC, Andover, KS
  • 6. What is a Bond?  In financial terms a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity.  A bond is a formal contract to repay borrowed money with interest at fixed intervals.Saunders Learning Group, LLC, Andover, KS
  • 7. Issuing bonds  Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets.  The most common process of issuing bonds is through underwriting.  In underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of bonds from an issuer and re-sell them to investors.  The security firm takes the risk of being unable to sell on the issue to end investors.Saunders Learning Group, LLC, Andover, KS
  • 8. Features of bonds  Bonds have a number of characteristics that play a role in determining the value of a bond.  Principal  Coupon  Price  Yield  maturity  credit qualitySaunders Learning Group, LLC, Andover, KS
  • 9. Principal The Principal is the amount of money the issuer will repay the bondholder at the maturity of bond Issuer Bondholder Saunders Learning Group, LLC, Andover, KS
  • 10. Coupon (The Interest Rate)  The coupon is the amount the bondholder will receive as interest payments. — Its called a "coupon" because sometimes there are physical coupons on the bond that you tear off and redeem for interest. — Now records are more likely to be kept electronically.  Most bonds pay interest every six months, but its possible for them to pay monthly, quarterly or annually.  The coupon is expressed as a percentage of the par value.Saunders Learning Group, LLC, Andover, KS
  • 11. PriceThe price of the a bonddepends on four factors: Market interest rates Credit quality Maturity Supply & demand Saunders Learning Group, LLC, Andover, KS
  • 12. Price of a Bond Varies Above par value premium Below par value Par value discount Bond Bond Saunders Learning Group, LLC, Andover, KS
  • 13. Bond YieldThe yield of a bond is the rate of return received from investing in the bond, is based on the price paid for the bond and the coupon payment. current yield=Annual coupon/ Price Rate of return on investment price Coupon payment Saunders Learning Group, LLC,Andover, KS
  • 14. Normal Yield CurveSaunders Learning Group, LLC, Andover, KS
  • 15. Bond Maturity The maturity date is the date in the future on which the investors principal will be repaid. As long as all payments have been made, the issuer has no more obligation to the bond holders after the maturity date. The length of time until the maturity date is often referred to as the term or tenor or maturity of a bond. There are three groups of bond maturities: — short term (bills): maturities up to one year — medium term (notes): maturities between one and ten years — long term (bonds): maturities greater than ten years A bond that matures in one year is much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, the longer the time to maturity, the higher the interest rate. All things being equal, a longer term bond will fluctuate more than a shorter term bond. Saunders Learning Group, LLC, Andover, KS
  • 16. Issuer  Who is issuing a bond is important to review, as the issuers stability is your main assurance of getting paid back.  For example, the U.S. government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small - so small that U.S. government securities are known as risk-free assets.  The general view is that a government will always be able to bring in future revenue through taxation.  A company, on the other hand, must continue to make profits, which is far from guaranteed.  This added risk means corporale bonds must offer a higher yield in order to entice investors - this is the risk/return tradeoff in action.Saunders Learning Group, LLC, Andover, KS
  • 17. Credit quality The credit rating of a bond is important to investors as it: Provides a standardized measures of relative credit quality Provides an impartial view of credit quality of the issue Allows the investor to compare issues of similar credit quality Saunders Learning Group, LLC, Andover, KS
  • 18. credit ratingcredit risk Moodys standard & Poors Fitch IBCAhighest quality Aaa AAA AAAhighest quality (very strong) Aa AA AAupper mediam grade(strong) A A Amedium grade Baa BBB BBBlower mediam grade Ba BB BB(some what speculative)lower grade (speculative) B B Bpoor quality (may default) Caa CCC CCCmost speculative Ca CC CCno interest in being paid or C C Cbankruptcy petition filedin default C D DSaunders Learning Group, LLC,Andover, KS
  • 19. Types of bonds Fixed rate bonds have a coupon that remains constant throughout the life of the bond. Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. Inflation linked bonds. in which the principal amount and the interest payments are indexed to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Saunders Learning Group, LLC, Andover, KS
  • 20. Types of bonds  Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation.  Perpetual bonds are also often called perpetuities or Perps. They have no maturity date.  Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen.  War bond is a bond issued by a country to fund a war.Saunders Learning Group, LLC, Andover, KS
  • 21. How To Read A Bond Table Column 1: Issuer - This is the company, state (or province) or country that is issuing the bond. Column 2: Coupon - The coupon refers to the fixed interest rate that the issuer pays to the lender. Column 3: Maturity Date - This is the date on which the borrower will repay the investors their principal. Typically, only the last two digits of the year are quoted: 25 means 2025, 04 is 2004, etc. Column 4: Bid Price - This is the price someone is willing to pay for the bond. It is quoted in relation to 100, no matter what the par value is. Think of the bid price as a percentage: a bond with a bid of 93 is trading at 93% of its par value. Column 5: Yield - The yield indicates annual return until the bond matures. Usually, this is the yield to maturity, not current yield. Saunders Learning Group, LLC, Andover, KS
  • 22. Bond Issuing & Investing Corporations issue bonds to provide for a number of financing needs. Some of this financing could be in the form of:  commercial paper (normally issued for less than 30 days) and used to fund things like accounts payable, payrolls etc.  Short-term bonds (less than a year) used to fund capital requirements and provide additional cash flow  Long-term bonds (more than a year) used to fund capital expenses like new buildings and equipment. Sovereign govt. issue bonds to cover a shortfall between taxation revenue and expenditure Govt. agencies, municipal, & local govt. authorities issue bonds to fund their service and operations Saunders Learning Group, LLC, Andover, KS
  • 23. Bond Markets Primary market – New bonds Issuer Investor Saunders Learning Group, LLC, Andover, KS
  • 24. Secondary Market bonds bonds Sells BuysInvestor A Broker Investor BSaunders Learning Group, LLC, Andover, KS
  • 25. Investment Banks (commonly called the Underwriter)Role of the Underwriter  To purchase the district’s bonds directly from the district and re-offer (sell) them to investors.Types of Bond SalesNegotiated sale - District hires an investment banking firm (or firms) to underwrite its bonds at a negotiated price. The financing structure is determined in accordance with the district’s specific needs or requirements relative to I&S tax rate preferences and/or refunding objectives. Size of negotiated underwriting team  With exception of financings under $10, most issuers will hire a team of from 2 to 6 investment banking firms (depending on the size of the issue). Selection process  Recommendation  Request For Proposals  Request For Qualifications Saunders Learning Group, LLC, Andover, KS
  • 26. Investment Banking Specialist Investment banking firm specialists involved in the underwriting process  The “banker” – called an investment banker, this specialist is part of the investment banking team.  “Bankers” generally have broad knowledge of the capital markets, debt instruments, debt structuring, document preparation, and marketing/distribution procedures.  One of their responsibilities is to solicit potential issuers with the goal of being included as a member of the issuer’s underwriting team.  Once their firm is hired they serve as the key contact/liaison person and coordinate with all parties to the financing to execute the underwriting.  The “underwriter” – an investment banking firm’s specialist who is directly responsible for pricing a district’s bond issue; i.e., determining the lowest possible combination of coupons and yields that will “sell” in the marketplace at the time of pricing.  The “sales representatives” – the persons who actually contact potential investors and sell the district’s bonds to those investors. Saunders Learning Group, LLC, Andover, KS
  • 27. Steps in the Negotiated Underwriting Process 1. Structuring - the lead investment banking firm (senior managing underwriter) is usually involved in the initial structuring and/or determining the plan of finance. 2. Hiring of underwriter’s counsel - the senior managing underwriter, the financial advisor and the issuer will jointly agree on a firm via consultation among themselves. 3. Documentation process. 4. Net Designations or Group Net 5. Pre-sale marketing activities by salesforce. 6. Pre-sale pricing calls among the underwriters, the FA and the issuer. 7. Order period - usually 2 hours during which the bonds are sold. 8. Sign bond purchase agreement - the district and the senior managing underwriter. Saunders Learning Group, LLC, Andover, KS
  • 28. Conclusion Bonds are just like lOUs. Buying a bond means you are lending out your money. Bonds are also called fixed-income securities because the cash flow from them is fixed. The issuers of bonds are governments and corporations. A bond is characterized by its face value, coupon rate, maturity and issuer. Yield is the rate of return you get on a bond. When price goes up, yield goes down, and vice versa. When interest rates rise, the price of bonds in the market falls, and vice versa. Bills, notes and bonds are all fixed-income securities classified by maturity. Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds. Bonds are not risk free. Its always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments. Saunders Learning Group, LLC, Andover, KS
  • 29. How Bond MARKETS WORKSaunders Learning Group, LLC, Andover, KS subtitle date 29
  • 30. BOND MARKET PLAYERS Bond: promise to pay back principal at some future date, plus periodic interest payments for use of investor’s money Bond issuers: entities that supply new bonds Bond investors: individuals and institutions that purchase bonds for interest income and long-term capital gains Bond dealers: intermediaries between bond issuers and investors Primary bond market: new bonds only; issuer-to-investor Secondary bond market: previously issued bonds; investor-to-investor Saunders Learning Group, LLC, Andover, KS
  • 31. U.S. Bond Market Market value = $36 trillion BOND MARKET RELATIVE TO STOCK MARKET  Average Daily Trading Volume  U.S. Bond Markets = $814.0 Billion  Stock Market = $104.9 Billion One of largest securities markets in world Quickly reflects changes in credit quality and in aggregate economic conditions, including interest rates Very efficient market mechanism Expensive place to trade for small investors Saunders Learning Group, LLC, Andover, KS
  • 32. Tracking Interest Rates Federal Funds Rate: overnight bank lending rate; lowest but most volatile money market rate Discount Rate: interest rate charged by the Federal Reserve to its member banks; key instrument of monetary policy Eurodollar Rate: interest rate charged for dollar-denominated loans in European banks LIBOR: London Interbank Offered Rates; London fed funds rate Saunders Learning Group, LLC, Andover, KS
  • 33. Bond Trading Activity Largely an OTC market—no primary physical location Low trading volume relative to stocks Par value: face amount, usually $1,000 Round lot: $1 million of par value Relatively illiquid for small investors Saunders Learning Group, LLC,Andover, KS
  • 34. Bond Ownership Saunders Learning Group, LLC, Andover, KS
  • 35. Conventions  Debt securities – Issued by borrowers to obtain liquidity or capital for their short term or long term needs  Promised payment events – Interest payment & Repayment of fixed amount  Secured & Unsecured  Risk prone – Not absolute risk free  Mid 2009 Debt market valued at $30 TrillionSaunders Learning Group, LLC, Andover, KS 35
  • 36. Types Of BondsSaunders Learning Group, LLC, Andover, KS 36
  • 37. Types of bonds Fixed rate bonds have a coupon that remains constant throughout the life of the bond. Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of interest, such as LIBOR or Euribor. Inflation linked bonds. in which the principal amount and the interest payments are indexed to inflation. The interest rate is normally lower than for fixed rate bonds with a comparable maturity. Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Saunders Learning Group, LLC, Andover, KS
  • 38. Types of bonds  Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation.  Perpetual bonds are also often called perpetuities or Perps. They have no maturity date.  Bearer bond is an official certificate issued without a named holder. In other words, the person who has the paper certificate can claim the value of the bond. Often they are registered by a number to prevent counterfeiting, but may be traded like cash. Bearer bonds are very risky because they can be lost or stolen.  War bond is a bond issued by a country to fund a war.Saunders Learning Group, LLC, Andover, KS
  • 39. Types Of Bonds Callable Bonds - A bond that can be redeemed by the issuer prior to its maturity.  main cause of a call is a decline in interest rates Convertible Bonds – A bond that can be converted into a predetermined amount of the companys equity at certain times during its life Eurodollar Bonds - U.S.-dollar denominated bond issued by an overseas company and held in a foreign institution outside both the U.S. and the issuers home nation  Chinese bank held dollar-denominated bonds issued by a Japanese company, this would be considered a eurodollar bond. Saunders Learning Group, LLC, Andover, KS
  • 40. Types Of Bonds Eurobond is an international bond that is denominated in a currency not native to the country where it is issued Yankee Bond - A bond denominated in U.S. dollars that is publicly issued in the U.S. by foreign banks and corporations Bulldog Bond - A sterling denominated bond that is issued in London by a company that is not British Saunders Learning Group, LLC, Andover, KS
  • 41. Types Of Bonds Maple Bond - A bond denominated in Canadian dollars that is sold in Canada by foreign financial institutions  Matilda/Kangaroo Bond - An bond denominated in the Australian dollar and issued on the Australian market by a foreign entity Samurai Bond - Yen-denominated bond issued in Tokyo by a non- Japanese company Saunders Learning Group, LLC, Andover, KS
  • 42. CORPORATE BONDS Uses of Corporate Debt Corporations must raise money to finance investments: —inventory, —plant and equipment, —research and development, —general business expansion. Corporations can issue equity securities (stocks), debt securities (bonds), or a combination of both Firms wish to minimize their cost of capital. Firms match their financing requirements with investor needs to issue a wide variety of debt instruments. Most corporate bonds bought by underwriters--no certificate issued, just book-entry form Saunders Learning Group, LLC, Andover, KS
  • 43. Corporate Bond Characteristics  Indenture: legal terms of bond agreement — trustee duties — how and when principal repaid — interest rate and when paid — collateral/security — callability terms — steps bondholder can take in case of default  Bearer/coupon bonds vs. registered bondsSaunders Learning Group, LLC, Andover, KS
  • 44. Corporate Debt Securities  Bridge financing  Closed-end mortgage bond  Bearer /coupon bonds  Open-end mortgage bond  Registered bonds  Serial bonds income bonds  Repo market  Unsecured corporate bonds/debentures  Money market  Senior bonds  Basis points  Mortgage bonds  Commercial paper  Equipment trust certificates  Bankers’ acceptances (bas)  Subordinated debenture  Negotiable CD/jumbo CD Saunders Learning Group, LLC, Andover, KS
  • 45. Fixed Income Products  Treasury Bills – Maturities with 6,12 & 18 months duration  Issued by the Treasury of the state  Always issued at discount  Government Bonds - Medium & long term bonds – known as bonos & obligaciones  Maturities of 10, 15 & 30 Years  Fixed Interest rate through annual couponsSaunders Learning Group, LLC, Andover, KS
  • 46. U.S. Government IssuesPrimary Dealers overnment-Sponsored EnterprisesT-Bills oolsT-Notes ortgage Securities /SecuritizationT-Bonds NMA annie Mae Saunders Learning Group, LLC, Andover, KS
  • 47. Federal Sources of Funds Collect tax revenues Print more money Issue public debt —Treasury Bills: short term, less than 1 year —Treasury Notes: 1-10 year maturities —Treasury Bonds: long term; 10-30 year maturities Saunders Learning Group, LLC, Andover, KS
  • 48. U.S. TREASURY SECURITIES Implement monetary policy—Federal Reserve System trades through its New York branch. —Increase money supply: buys Treasuries —Decrease money supply: sells Treasuries Efficient means to finance federal deficit Treasury issues bonds, notes, bills through regularly scheduled public auctions to primary dealers —Dealers obligated to bid at every auction —Must maintain bids, offers and inventories for secondary market Saunders Learning Group, LLC, Andover, KS
  • 49. U.S. Treasury Securities Secondary (Capital) Market Safest bonds in circulation Enormous trading volume: $190.7 billion per day; most liquid market in world T-bills: —mature in less than one year, usually 3 and 6 months —face values of $10,000 to $1 million —do not pay interest; traded at discount from par T-notes: —maturities 1-10 yrs —semiannual interest —face values of $5,000 to $1 million T-bonds: 10 to 30 yr. maturities Saunders Learning Group, LLC, Andover, KS
  • 50. Agency & Asset-Backed Securities Markets Government-sponsored enterprises: private corporations with public purposes Pools: diversified loan portfolios Mortgage securitization: creating pools of mortgages and selling shares of pools; —Ginnie Maes, Fannie Maes, Freddie Macs —Active secondary market provides liquidity —Pay low semiannual interest Other asset-backed securities: —credit card debt, auto loans, home equity loans, equipment leases Repo market: dealers lend securities short term Saunders Learning Group, LLC, Andover, KS
  • 51. JUST WHAT IS THE MONEY MARKET? Buying and selling short-term debt securities; quick cash conversion Safety: short maturities and diversification Include Private Paper: —Commercial paper —Bankers’ acceptances (Bas) —Jumbo CDs State & Local Governments: Project Notes —tax anticipation notes —bond anticipation notes —revenue anticipation notesSaunders Learning Group, LLC, Andover, KS
  • 52. Municipality-Issued Securities Municipal Bonds  Revenue Bonds —Bonds anticipating future cash  Industrial Revenue Bonds  Tax-Anticipation Notes  Bond-anticipation Notes  Backed by Good Name of  Revenue-Anticipation Notes Municipality —Moral Obligation Bonds Clientele Effect —General Obligation (GO) Bonds —High tax bracket investors  Double-Barreled Bonds Limited Tax Bonds —Backed by 2+ sources of funds —Payable from cash generated by specific tax Saunders Learning Group, LLC, Andover, KS
  • 53. Fixed Income Products Repo – Repurchase Agreements (Not necessarily FI product) Is a contract in which a security is sold with an agreement to repurchase the security at a higher price Saunders Learning Group, LLC, Andover, KS 53
  • 54. Fixed Income Products Repo Reverse Repo is a contract in which a security is borrowed with an agreement to replace the security at a higher price Secured lending and borrowing Saunders Learning Group, LLC, Andover, KS
  • 55. Fixed Income Products  Commercial Paper – Zero Coupon bonds issued at discount  Short term with maturities 1,3,6,12 & 18 months  Placed in the primary market through competitive auctions  Convertible/Exchangeable Bonds  Enables a financial asset to be transformed into otherSaunders Learning Group, LLC, Andover, KS
  • 56. Fixed Income Products Commercial Paper - An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities.  Maturities on commercial paper rarely range any longer than 270 days Certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions  Held until maturity Saunders Learning Group, LLC, Andover, KS
  • 57. Fixed Income DerivativesSaunders Learning Group, LLC, Andover, KS
  • 58. MBS  A mortgage-backed security (MBS) is an asset-backed security or debt obligation that represents a claim on the cash flows from mortgage loans, most commonly on residential property.  Residential mortgage-backed security (RMBS)  Commercial mortgage-backed security  Collateralized mortgage obligation  Stripped mortgage-backed securities  Interest-only stripped mortgage-backed securities  Principal-only stripped mortgage-backed securitiesSaunders Learning Group, LLC, Andover, KS
  • 59. Weapons Of Financial DestructionCollateralized Debt Obligation Process Of Securitization Saunders Learning Group, LLC, Andover, KS
  • 60. Interest Rate Swap  Interest rate swap is a derivative in which one party exchanges a stream of interest payments for another partys stream of cash flows  Fixed for floating/Vanilla Interest Rate Swaps  Often use LIBOR as reference rates  Hedging/Speculation on interest & FX ratesSaunders Learning Group, LLC, Andover, KS
  • 61. Interest Swaps – Illustrated Time 6-Month Fixed Rate Floating Rate Swap 0 2.80% –100.0 –100.0 0 0.5 3.40% 2.3 1.4 0.9 1 4.40% 2.3 1.7 0.6 1.5 4.20% 2.3 2.2 0.1 2 5.00% 2.3 2.1 0.2 2.5 5.60% 2.3 2.5 –0.2 3 5.20% 2.3 2.8 –0.5 3.5 4.40% 2.3 2.6 –0.3 4 3.80% 102.3 102.2 0.1Saunders Learning Group, LLC, Andover, KS
  • 62. Interest Rate Caps An interest-rate cap is an OTC derivative in which the buyer receives payments at the end of each period in which the interest rate (reference rate/LIBOR) exceeds the agreed strike rate (Cap rate) 3-year, USD 200MM notional cap 6-month Libor - index rate, struck at 7.5%. Protects from int. rate rises Saunders Learning Group, LLC, Andover, KS
  • 63. Interest Rate Floors An interest rate floor is a derivative in which the buyer of the floor receives money if on the maturity the reference rate fixed is below the agreed strike price of the floor Protects holder from declines in short-term interest 3-year, USD 200MM notional cap 6-month Libor - index rate, struck at 7.5%. Saunders Learning Group, LLC, Andover, KS
  • 64. Swaps  A swapt is an option granting its owner the right but not the obligation to enter into an underlying swap  the term "swapt" typically refers to options on interest rate swaps  A payer swap gives the owner of the swaption the right to enter into a swap where they pay the fixed leg and receive the floating leg.  A receiver swap gives the owner of the swaption the right to enter into a swap where they will receive the fixed leg, and pay the floating leg.Saunders Learning Group, LLC, Andover, KS
  • 65. Swaption  Designed to give the holder the benefit of the agreed-upon strike rate if the market rates are higher  American swaption, in which the owner is allowed to enter the swap on any day that falls within a range of two dates.  European swaption, in which the owner is allowed to enter the swap only on the maturity date.  Bermudan swaption, in which the owner is allowed to enter the swap only on certain dates that fall within a range of the start (roll) date and end date.Saunders Learning Group, LLC, Andover, KS
  • 66. Investment Banks (commonly called the Underwriter)Role of the Underwriter  To purchase the district’s bonds directly from the district and re-offer (sell) them to investors.Types of Bond SalesNegotiated sale - District hires an investment banking firm (or firms) to underwrite its bonds at a negotiated price. The financing structure is determined in accordance with the district’s specific needs or requirements relative to I&S tax rate preferences and/or refunding objectives. Size of negotiated underwriting team  With exception of financings under $10, most issuers will hire a team of from 2 to 6 investment banking firms (depending on the size of the issue). Selection process  Recommendation  Request For Proposals  Request For Qualifications Saunders Learning Group, LLC, Andover, KS
  • 67. Investment Banking Specialist Investment banking firm specialists involved in the underwriting process  The “banker” – called an investment banker, this specialist is part of the investment banking team.  “Bankers” generally have broad knowledge of the capital markets, debt instruments, debt structuring, document preparation, and marketing/distribution procedures.  One of their responsibilities is to solicit potential issuers with the goal of being included as a member of the issuer’s underwriting team.  Once their firm is hired they serve as the key contact/liaison person and coordinate with all parties to the financing to execute the underwriting.  The “underwriter” – an investment banking firm’s specialist who is directly responsible for pricing a district’s bond issue; i.e., determining the lowest possible combination of coupons and yields that will “sell” in the marketplace at the time of pricing.  The “sales representatives” – the persons who actually contact potential investors and sell the district’s bonds to those investors. Saunders Learning Group, LLC, Andover, KS
  • 68. Steps in the Negotiated Underwriting Process 1. Structuring - the lead investment banking firm (senior managing underwriter) is usually involved in the initial structuring and/or determining the plan of finance. 2. Hiring of underwriter’s counsel - the senior managing underwriter, the financial advisor and the issuer will jointly agree on a firm via consultation among themselves. 3. Documentation process. 4. Net Designations or Group Net 5. Pre-sale marketing activities by salesforce. 6. Pre-sale pricing calls among the underwriters, the FA and the issuer. 7. Order period - usually 2 hours during which the bonds are sold. 8. Sign bond purchase agreement - the district and the senior managing underwriter. Saunders Learning Group, LLC, Andover, KS
  • 69. Conclusion Bonds are just like lOUs. Buying a bond means you are lending out your money. Bonds are also called fixed-income securities because the cash flow from them is fixed. The issuers of bonds are governments and corporations. A bond is characterized by its face value, coupon rate, maturity and issuer. Yield is the rate of return you get on a bond. When price goes up, yield goes down, and vice versa. When interest rates rise, the price of bonds in the market falls, and vice versa. Bills, notes and bonds are all fixed-income securities classified by maturity. Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds. Bonds are not risk free. Its always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments. Saunders Learning Group, LLC, Andover, KS
  • 70. QuestionsSaunders Learning Group, LLC, Andover, KS
  • 71. Reference Material Figuring Out Wall Street Consumer’s Guide To Financial Markets By Floyd Saunders Publisher: Saunders Learning Group ISBN: 978-0-9824019-0-3 available from Amazon, B&N, and http://www.figuringout wallstreet.com or www.floydsaunders.com Book summary: From bank failures to home foreclosures and panic around the world, Figuring Out Wall Street, is the concise guide to help everyone understand how this latest crisis happened, who was responsible and what to do now to restore our financial systems. Written in an easy to understand manner, even the most complex financial concepts are easy to digest. This book provides help to monitor investments with a review of investment products, financial regulators and economic indicators. Learn how the stock market exchanges work and the world of investment banking, hedge funds, venture capital and private equity. Every chapter includes action plans for investing.Saunders Learning Group, LLC, Andover, KS
  • 72. Glossary of Bond Finance Terms - AAccrued interest. Coupon interest accumulated on a bond or other obligation since the last interest payment or, for a newissue, from the dated date to the date of delivery. Usually interest on municipal bonds is payable semi-annually, every sixmonths. When you buy a bond in mid-term you are only entitled to the interest the bond earns after you buy it. The interestearned previously, the accrued interest, belongs to the seller.Ad Valorem Tax. A state or local government tax based on the value of real property as determined by the county tax assessor.Advanced Refunded Bonds. A municipality or school district may sell a second bond issue at a lower interest rate cost, placingthe proceeds of the issue in an escrow account from which the first issues principal and interest will be repaid when due.Amortization of Debt. The annual reduction of principal through the use of serial bonds or term bonds with a sinking fund.Arbitrage. The interest rate differential that exists when proceeds from a municipal bond - which is tax-free and carries a loweryield - are invested in taxable securities with a yield that is higher. The 1986 Tax Reform Act made this practice bymunicipalities illegal solely as a borrowing tactic, except under certain safe-harbor conditions.Assessed Valuation. A municipalitys worth in dollars based on real estate and/or other property for the purpose of taxation,sometimes expressed as a percent of the full market value of the community.Authorizing Ordinance. A law that when enacted allows the unit of government to sell a specific bond issue or finance aspecific project.Average Life. The average length of time an issue of serial bonds and/or term bonds with mandatory sinking funds and/orestimated prepayments is expected to be outstanding. It also can be the average maturity of a bond portfolio. Saunders Learning Group, LLC, Andover, KS
  • 73. Glossary of Bond Finance Terms - BBalloon Maturity. An inordinately large amount of bond principal maturing in any single year. This is also referred to as a Term Bond.Bond Anticipation Note. A short-term security, one year or less, used for interim financing to be repaid from the proceeds of a plannedlong-term bond issue.Basis Point. One one-hundredth of one percent (1/100 % or 0.01 percent). Thus 25 basis points equal one-quarter of one percent, 100basis points equal one percent. This is typical in-group, professional bond talk.Bid. An offer to buy at a fixed price or yield. As opposed to Ask, which is an offering to sell.Bond or note. A security whereby an issuer borrows money from an investor and agrees and promises, by written contract, to pay afixed principal sum on a specified date (maturity date) and at a specified rate of interest.Bond Fund (Tax-Exempt). A Bond Fund is a portfolio of municipal bonds sponsored or administered by registered investmentcompanies. These companies offer shares to investors either through (1) closed-end funds or unit investment trusts, which offer sharesof a fixed portfolio of municipal bonds; or (2) open-end or managed funds, which offer shares in a managed portfolio of municipalbonds whose size will vary as shares are purchased or redeemed.Bond Insurance. Insurance issued by a private insurance company for either an entire issue or specific maturities that guarantees topay principal and interest when due.Bond Premium. The amount at which a bond or note is bought or sold above its par value or face value without including accruedinterest.Bonded Debt. The portion of an issuers debt structure represented by outstanding bonds, sometimes limited by constitutional orlegislative restraints.Book Entry. A system of security ownership in which the ownership is held as a computer entry on the records of a central company forits owner. The bond owner gets a computer printout as proof of ownership.Broker. Technically a broker is a bond trader in the secondary market buying from and selling to bond dealers. Its most common usageis as a description of a bond salesperson. Saunders Learning Group, LLC, Andover, KS
  • 74. Glossary of Bond Finance Terms - C Callable Bond. A bond or note that is subject to redemption at the option of the issuer prior to its stated maturity. The call date and call premium, if any, is stated in the offering statement or brokers confirmation. Certificates of Participation (COPs). A form of a lease revenue bond that permits the investor to participate in a stream of installment payments, lease payments or loan payments relating to the acquisition or construction of specific equipment, land or facilities. COPs are not viewed legally as "debt" because payment is tied to an annual appropriation by the government body. As a result, COPs are seen by investors as providing weaker security and often carry ratings that are a notch or two below an agencys general obligation rating. Coupon. The Coupon is the detachable part of a bond that displays the rate of interest due, and the interest payment date. When there were bearer bonds, coupons were often detached from the bonds and presented to the paying agent for payment just as one might cash a government check. Coupon Rate. The specified annual interest rate payable to the bond or note holder as printed on the bond. This term is still used even though there are no coupon bonds anymore. Covenant. A legally binding commitment by the issuer of municipal bonds to the bondholder. This is the issuer’s promise to perform or repay, conversely, an impairment of a covenant can lead to a Technical Default. Current Refunding. A refunding transaction where the municipal securities being refunding will all mature or be redeemed within 90 days or less from the date of issuance of the refunding issue. Current Yield. The ratio of the coupon rate on a bond to the dollar purchase price expressed as a percentage. Cushion Bonds. Bonds selling at a premium are called "cushion" bonds because they cushion the price volatility in an up and down market. A premium bond, by definition, has a higher-than-market coupon interest rate. The dollar price movement of a high interest rate bond is less than that of a lower interest rate bond of the same maturity when general interest rates move up or down a few basis points. Saunders Learning Group, LLC, Andover, KS
  • 75. Glossary of Bond Finance Terms - D Dated Date. The date carried on the face of a bond or note from which interest normally begins to accrue, the “dated date”. Dealer. A dealer is a corporation or partnership that buys and sells and maintains an ongoing position in bonds and/or notes. They are also authorized to underwrite new issues. Debt Limited. The debt limit is the maximum statutory or constitutional amount of debt that the general obligation bond issuer can either issue or have outstanding at any time. Debt Ratio. The ratio of the issuers general obligation debt to a measure of value, like real property valuations, personal income, general fund resources, or population. Debt Service. Required payments for principal and interest. Default. Failure to pay in a timely manner principal and/or interest when due, or a Technical Default, the occurrence of an event as stipulated in the Indenture of Trust resulting in an abrogation of that agreement. A Technical Default can be a warning sign that a default on debt service is coming, however in the real world actual debt service interruption does not always occur if the problems are resolved in time. Defeased Bonds. Refunded bonds for which the payment of principal and interest has been assured through the structuring of a portfolio of government securities, the principal and interest on which will be sufficient to pay debt service on the refunded, outstanding bonds. When a bond issue is defeased, the claim on the revenues of the issuer is usually eliminated. Saunders Learning Group, LLC, Andover, KS
  • 76. Glossary of Bond Finance Terms - DDelivery. Delivery and payment must be in three business days for bonds bought or sold in the secondary market.For new issues, the time when payment is made to, and the executed bonds and notes are received from, theissuer. New-issue delivery takes place several weeks after the sale to allow the bonds and notes to be printed andsigned.Denomination. The face or par amount - normally $1000 or $5000 but can be $100,000 or more in the case of anote - that the issuer promises to pay at a specific bond or note maturity.Direct Debt. In general obligation bond analysis, the amount of debt that a particular local unit of governmenthas incurred in its own name or assumed through annexation.Discount. The amount of dollars by which market value of a bond is less than par value or face value.Discount Bonds. Bonds which sell at a dollar price below par in which case the yield would exceed the couponrate. The difference between the discount price and the maturity price is subject to federal capital gains taxexcept in the case of Original Issue Discount Bonds.Dollar Bond. Generally a term bond that is quoted and traded in dollars rather than in yield-to-maturity. They arewell known issues of well known names in the market. Saunders Learning Group, LLC, Andover, KS
  • 77. Glossary of Bond Finance Terms – E to FEscrow Fund. A fund that contains monies that only can be used to pay debt service.Escrowed to Maturity. Also called an “Advanced Refunded” bond. When interest rates fall, an issuer may chose tosell a new issue called a refunding issue and use the proceeds of the second issue to pay off the original issue,much the same as a home owner refinancing a mortgage in an effort to save interest costs. The proceeds of therefunding issue are used to structure a portfolio of U.S. government securities, the principal and interestpayments of which exactly match the principal and interest payments of the refunded bonds. The portfolio isplaced in escrow at the paying agent and the bond issue is said to be fully defeased and escrowed to maturity. Inactual practice the bonds are usually called on the first call date. Because of the U.S. Treasury backing, advancedrefunded or escrowed to maturity bonds are considered the safest municipal bonds available and trade on themarket as a rich triple-A.Financial Advisor. Generally an independent consulting firm, an investment-banking company, individual, or bankthat advises the issuer on financial matters regarding a proposed issue and is not part of the underwritingsyndicate.Fiscal Agent. Also known as the Paying Agent, the bank, designated by the issuer, to pay interest and principal tothe bondholder.Fiscal Year. A 12-month time horizon by which state and local governments annually budget their respectiverevenues and expenditures. Often this time horizon is from July to June but can vary.Flow of Funds. The annual legal sequence by which enterprise revenues are paid out for operating andmaintenance costs, debt service, sinking fund payments, and so on.Full Faith and Credit. The pledge of "the full faith and credit and taxing power without limitation as to rate oramount." This phrase is generally used regarding General Obligation bonds to express the pledge of utilizing alltaxing powers and resources, if necessary, to pay the bond holders. Saunders Learning Group, LLC, Andover, KS
  • 78. Glossary of Bond Finance Terms – G, H , IGeneral Obligation Bond. (G.O.) A bond secured by a pledge of the issuers taxing powers (limited or unlimited).Considered the most secure of all municipal debt. General obligation bonds of local governments are paid fromad valorem property taxes and other general revenues.Guaranteed Yield: The guaranteed yield is a school finance plan in which the state specifies a revenue yield thatit will guarantee in terms of revenue per student per penny of local tax effort. Districts adopt tax rates and levytaxes. The state makes up the difference between what each district levies locally per student and theguaranteed yield per student. High-wealth districts may raise all of their guaranteed yield revenue from local taxsources.Hold Harmless: Hold harmless provisions are common when a significant change is made to a formula or fundingsource. "Hold harmless" is a term used to describe a provision in new law that is designed to protect a schooldistrict from a loss of local revenue or state aid.Indenture of Trust. A legal document describing in specific detail the terms and conditions of a bond offering,the rights of the bondholder, and the obligations of the issuer to the bondholder; such document is alternativelyreferred to as a bond resolution.Interest and Sinking Fund (I&S) Tax Rate: Also referred to as the debt service tax rate, the I&S taxes pay forbonded indebtedness, facilities, and other capital needs.Interim Borrowing. (1) Short-term loans to be repaid from general revenues or tax collections during the currentfiscal year (TRANs or RANs); (2) short-term loans in anticipation of bond issuance or grant receipts (BANs).Investment Grade. Bond issues that the three major bond rating agencies, Moodys, Standard & Poors, and Fitchrate BBB or Baa or better. Many fiduciaries, trustees, some mutual fund managers can only invest in securitieswith an investment grade rating. Saunders Learning Group, LLC, Andover, KS
  • 79. Glossary of Bond Finance Terms – J & LJunk Bonds. Most non-rated bonds and bonds rated below investment grade.Legal Opinion. A written opinion from bond counsel that an issue of bonds was duly authorized and issued. Theopinion usually includes the statement, "interest received thereon is exempt from federal taxes and, in certaincircumstances, from state and local taxes."Letter of Credit. A form of supplement or, in some cases, direct security for a municipal bond under which acommercial bank or private corporation guarantees payment on the bond under certain specified conditions.Level Debt Service. Principal and interest payments that, together, represent more or less equal annualpayments over the life of the loan. Principal may be serial maturities or sinking fund installments.Lien. A claim on revenues, assessments or taxes made for a specific issue of bonds.Limited Tax Bond. A bond secured by a pledge of a tax that is limited as to rate or amount. Saunders Learning Group, LLC, Andover, KS
  • 80. Glossary of Bond Finance Terms – M & NMaximum Annual Debt Service. The maximum amount of principal and interest due by a revenue bond issuer onits outstanding bonds in any future fiscal year. This is sometimes the amount to be maintained in the Debt ServiceReserve Fund.Municipal Bond. Bonds issued by any of the 50 states, the territories and their subdivisions, counties, cities,towns, villages and school districts, agencies, such as authorities and special districts created by the states, andcertain federally sponsored agencies such as local housing authorities. Historically, the interest paid on thesesbonds has been exempt from federal income taxes and is generally exempt from state and local taxes in the stateof issuance.Municipal Securities Rulemaking Board (MSRB). An independent self-regulatory organization established byCongress in 1975 which is charged with primary rulemaking authority - under the SEC - over dealers, dealer banks,and brokers in the municipal securities industry.Net Bonded Debt. Gross general obligation debt minus self-supporting general obligation debt, housing bonds,water revenue bonds, etc.Net Interest Cost (NIC). In general, issuers award competitive bond sales to the underwriter bidding the lowestNIC. This represents the average coupon rate weighted to reflect the time until repayment of principal andadjusted for the premium or discount.Net Revenue Available for Debt Service. Usually, gross operating revenues of an enterprise less operating andmaintenance expenses but exclusive of depreciation and bond principal and interest. Thus, net revenue isdefined to determine coverage on revenue bond issues. Saunders Learning Group, LLC, Andover, KS
  • 81. Glossary of Bond Finance Terms - OOfficial Statement (OS) or Offering Circular (OC). A document or prospectus circulated for an issuer prior to abond sale with relevant facts pertaining to the proposed financing. Usually there are two OSs, the first of which isknown as the preliminary, or "red herring" - so named because some of the type on its cover is printed in red. Theprospectus or red herring is supposed to be available to the investor prior to the sale often used to determineinterest from investors.Original Issue Discount. Certain maturities of a new bond issue may have an offering price substantially belowpar. The appreciation from the original price to par over the life of the bonds is treated as tax-exempt incomeand is not subject to capital gains tax. Pleas see Zero Coupon Bond.O.T.C. Over The Counter. Not on an exchange. OTC refers to the buying and selling method used in thesecondary market for municipal bonds and unlisted stocks.Overlapping Debt. Overlapping debt is the proportionate share of the general obligation bonds of localgovernments located wholly or in part within the limits of the reporting governmental entity that must be paid byproperty owners within the unit. Saunders Learning Group, LLC, Andover, KS
  • 82. Glossary of Bond Finance Terms - PPar Value. Par Value is the principal or face value of a bond, usually $5,000 due the holder at maturity. It has norelation to the market value. It is considered to be 100 for pricing purposes.Parity Bonds. Revenue bonds that have an equal lien on the revenues of the issuer.Paying Agent. Also Fiscal Agent. Generally a bank that performs the function of paying interest and principal forthe issuing body.Premium. A premium is the amount by which the price exceeds the principal amount (par value) of a bond. Thecurrent yield of a premium bond will be less than its coupon rate.Price to Call. The yield of a bond priced to the first call date rather than maturity.Primary Market. The new issue marketPrincipal. The face value of a bond, not including interest.Put Bond. A put bond that can be redeemed by the bondholder on a date or on a date or dates prior to the statedmaturity date. Saunders Learning Group, LLC, Andover, KS
  • 83. Glossary of Bond Finance Terms Q & RQualified Legal Opinion. Conditional affirmation of the legal basis for the bond or note issue. The averageinvestor should avoid any but the strongest opinion by the most recognized bond approving attorneys.Rate Covenant. A legal commitment by a revenue bond issuer to maintain rates at levels to generate a specifieddebt-service coverage.Ratings. Various alphabetical and numerical designations used by institutional investors, Wall Street underwriters,and commercial rating companies to give relative indications of bond and note creditworthiness. Standard &Poors and Fitch Investors Service Inc. use the same system, starting with their highest rating of AAA, AA, A, BBB,BB, B, CCC, CC, C, and D for default. Moodys Investors Services uses Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, and D .Recapture: Also referred to as the “Robin Hood” provision. Recapture is a characteristic of school finance wherelocal districts give the state locally collected property tax revenues for reallocation through the FoundationSchool Program. Chapter 41 of the Texas Education Code is where the recapture provision can be found and is asignificant feature of the Texas school finance equalization system.Red Herring. A preliminary offering statement, subject to final change and update upon completion of sale ofbonds. The name comes from the red type along the side on the cover.Redemption. Process of retiring existing bonds prior to maturity from excess earnings or proceeds of refundingbonds. It also refers to redeeming shares in a mutual fund by selling the shares back to the sponsor.Refunding Bond. The issuance of a new bond for the purpose of retiring an already outstanding bond issue.Registered Bond. A non-negotiable instrument in the name of the holder either registered as to principal or as toprincipal and interest. Saunders Learning Group, LLC, Andover, KS
  • 84. Glossary of Bond Finance Terms - SSecurity. The legally available revenues and assets that are used to pay the bond holders. This is the keycomponent that supports debt service.Serial Bond. As opposed to a Term Bond, which is a large block of bonds maturing in a single year, a serial bond isan issue that features maturities every year, annually or semiannually over a period of years.Short Term. Bonds or notes sold on an interim basis with tax-exempt securities for a period of from one to fiveyears.Sinking Fund. A sinking fund is where monies are escrowed on a periodic basis to retire term bonds at or prior tomaturity.Sinking Fund Schedule. A schedule of payments required under the original revenue bond resolutions to beplaced each year into a special fund, called the sinking fund, and to be used for retiring a specified portion of aterm bond issue prior to maturity.Special Assessment Bond. A bond secured by a levy of special assessments, as opposed to property taxes, madeby a local unit of government on certain properties to pay the cost of local improvements and/or services thatrepresents the specific benefit to the property owner resulting from the improvement.Street Name. Street name refers to the registration of bonds in the name of a dealer or other third party insteadof the owner, usually for custodial or safe keeping purposes.Swap. The exchange of one bond for another. Generally, the act of selling a bond to establish an income tax lossand replacing the bond with a new item of comparable value. Saunders Learning Group, LLC, Andover, KS
  • 85. Glossary of Bond Finance Terms - TTax Base. The total resource of the community that is legally available for taxation.Taxable Equivalent Yield. The yield an investor would have to obtain on a taxable corporate or U.S. government bond tomatch the same after-tax yield on a municipal bond.Tax-exempt Bond. Bonds exempt from federal income, state income, or state tax and local personal property taxes. Thistax exemption results from the theory of reciprocal immunity: States do not tax instruments of the federal governmentand the federal government does not tax interest of securities of state and local governments.Technical Default. Failure by the issuer to meet the requirements of a bond covenant. These defaults do not necessarilyresult in losses to the bond holder. The default may be cured by simple changes of policy or actions by the issuer.Tender. The act of offering bonds to a sinking fund.Term Bond. A large block of bonds of long maturity. They may be part of a serial Bond issue; there may be more than oneterm bond in an issue or a single maturity. Some are subject to a sinking fund redemption.Tombstone. An advertisement placed for information purposes, after bonds or notes are sold, that describes certaindetails of the issue and lists the managing underwriters and or the members of the underwriting syndicate.Trustee. A bank designated as the custodian of funds and official representative of bondholders. Trustees are appointedto insure compliance with the trust indenture and represents bondholders to enforce their contract with the issuer. Saunders Learning Group, LLC, Andover, KS
  • 86. Glossary of Bond Finance Terms U to ZUnderwrite. An agreement to purchase an issuers unsold securities at a set price, thereby guaranteeing theissuer proceeds and a fixed borrowing cost.Variable Rate Bond. A bond whose yield is adjusted periodically according to a prescribed formula.Yield Curve. Graph depicting the relationship between yields and current maturity for securities with identicaldefault risk.Yield-to-call. Return available to call date taking into consideration the current value of the call premium, if any.Yield-to-maturity. (YTM) Return available taking into account the interest rate, length of time to maturity, andprice paid. It is assumed that the coupon reinvestment rate for the life of the bonds will be the same as the yield-to-maturity.Zero-coupon Bonds. A deep discount municipal bond on which no current interest is paid. Instead, at bondmaturity, the investor receives compounded interest at a specified rate. The difference between the discountprice at purchase and the accreted value at maturity is not taxed as a capital gain but is considered tax-exemptinterest. Often used for college savings bonds. Saunders Learning Group, LLC, Andover, KS

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