2. Nostro Account
Meaning - In the Foreign Exchange Market and transact in foreign currencies, banks maintain accounts with other banks globally. This is known as a Nostro Account. âNostroâ and âVostroâ
are Italian words for âOurâ and âYourâ respectively. A nostro account is our account in a different country and a vostro account is a foreignerâs account in our country. A nostro account is
always in foreign Currency while a vostro account is in home currency.
Description â
Nostro account are most commonly used for
currency settlements where a bank or other
financial institutions needs to hold balance in
a currency other then its home accounting
units. A bank counts a Nostro account with a
credit balance as a cash asset and vostro
account with a credit balance is a labilities.
Further, the statement which it receives from
the bank with which it maintains account in
foreign currency is known as a Nostro account
statement. The replica of this account is
maintained by the bank in its own books for
operational purposes in local currency and is
known as a Nostro mirror account. It is
maintained by the local bank for accounting
of inflows and outflows of forex taking place
from a Nostro account of the bank.
Key players â
The Foreign Exchange (FX) Market is one of
the biggest and most liquid markets in which
currencies are traded over the counter (OTC)
involving players like
â˘central banks,
â˘corporate majors,
â˘hedge funds,
â˘investment banks,
â˘commercial banks etc.
It aids activities such as cross-border trade,
mergers & acquisitions, tourism, etc.
Transactions â
Transactions taking place in the Nostro mirror
account can broadly be discussed as:
1. Purchase of foreign currency â When the
local bank receives credit in its Nostro
account by the way of inward remittance, it
buys the foreign currency from the
beneficiary of the remittance at TT buying
rate, pays him in the local currency and
passes the following account entries:
Debit: Mirror of Nostro account
Credit: Beneficiary
2. Sale of foreign currency - When the local
bank remits foreign currency through its
Nostro account, it sells the foreign currency to
the remitter at Selling rate, pays off the
beneficiary to the debit of its Nostro account,
and passes the following account entries:
Debit: Customer
Credit: Mirror of Nostro account
Features-
1. Require for overseas transactions.
2.Maintained in the currency of that country
where such account is opened.
3.A current account no interest paid, if
overdrawn interest is payable.
4.Inflow of foreign currency is credited and
outflow of foreign currency is debited
5.The balance is included in the foreign
currency position of the bank.
6.For the balance sheet purpose, foreign
currency balance is notionally converted in
local currency at current FX rate.
Key Points â Nostro Mirror Account, Nostro account statements.
3. Bonds
Meaning - A bond, also known as a fixed income security, is a debt instrument created for the purpose of raising capital. They are
essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount
of money at specified future dates (Interest). A bond has an end date when the principal of the loan is due to be paid to the bond owner
and usually includes the terms for variable or fixed interest payments that will be made by the borrower.
Types of Bond-
1. Treasury bonds- Treasuries are issued by the
federal government to finance its budget deficits.
2. Other U.S. government bonds- Also called agency
bonds, these bonds are issued by federal agencies.
Agency yields are higher than Treasury yields because
they are not full-faith and-credit obligations of the
U.S. government, but the credit risk is considered
minimal.
3. Investment-grade corporate bonds- Investment-
grade corporates are issued by companies with strong
balance sheets. They carry ratings of at least triple-B
from Standard & Poor's, Moody's Investors Service or
both. For investment-grade bonds, the risk of default
is considered pretty remote.
4. High-yield bonds- These bonds are issued by
companies with weak balance sheets. They carry
ratings below triple-B. Default is a distinct possibility.
5. Foreign bonds- A foreign bond issue in a domestic
market by a foreign borrower in a currency of a
country in which it is sold.
6. Municipal bonds- Municipal bonds -- often called
"munis" are issued by U.S. states and local
governments or their agencies, and they come in both
the investment-grade and high-yield varieties. The
interest is tax-free.
Characteristics of Bonds-
1. Face value is the money amount the bond will be
worth at maturity, it is also the reference amount the
bond issuer uses when calculating interest payments
2. Coupon rate is the rate of interest the bond issuer
will pay on the face value of the bond, expressed as a
percentage.
3. Coupon dates are the dates on which the bond
issuer will make interest payments. Payments can be
made in any interval, but the standard is semi-annual
payments.
4. Maturity date is the date on which the bond will
mature and the bond issuer will pay the bondholder
the face value of the bond.
5 Issue price is the price at which the bond issuer
originally sells the bonds
Varieties of Bonds
1. Coupon Bonds- Bonds that make a coupon
payment are called âcoupon bondsâ.
2. Zero-coupon bonds do not pay coupon payments,
and instead are issued at a discount to their par value
that will generate a return once the bondholder is
paid the full face value when the bond matures. U.S.
Treasury bills are a zero-coupon bond.
3. Convertible bonds are debt instruments with an
embedded option that allows bondholders to convert
their debt into stock (equity) at some point,
depending on certain conditions like the share prices.
4.Callable or Putable bonds also have an embedded
option but it is different than what is found in a
convertible bond. A callable bond is one that can be
âcalledâ back by the company before it matures
Bond
Origination
Bond Trading
Bond Maturity
Bond Life Cycle
Primary Market
Issuers-Dealers-Investors
Maturity
Issuers-Investors
Secondary
Market
Dealers-Investors
Refinancing