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83 Cards in this Set
- Front
- Back
Money Market Definition
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Associated withthe issuance and trading of ST (<1 yr.) debt obligations of large corporations, FI's and governments
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Who can borrow in the Money Markets
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Only high quality entities and individual issues are large
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Investors in Money Market Instruments
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Include corporations and FI's who have idle cash but are restricted to a ST investment horizon
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Essential function of MM's
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serve to allocate the nation's supply of liquid funds among major ST lender and borrowers
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Treasury Bills
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ST obligations issued by the US government
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Federal Funds
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ST funds transferred between financial institutions usually for no more than a day
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Repurchase Agreements
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AKA Repo's, egreement involving the sale of securities between parties with a promise to repurchase the security at a specific date and price
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Commercial Paper
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ST unsecured promissory notes issued by a company to raise ST cash
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Negotiable Certificates of Deposit
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negotiable bank-issued time deposit with specified interest rate and maturity
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Banker Acceptances
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time draft payable to seller of goods, with payment guaranteed by bank
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Who issues T-Bills, and why?
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Issued by US goernment to cover government budget deficits and to refinance maturing debt
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What are Tbill maturities
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Standard Original Maturities of 13, 26, or 52 weeks
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T-Bill Denominations
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Denominations are $1000 but typical round lot is $5M
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Auction process for T-Bills
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1. Amount of new 13 and 26 week T-bills offered announced weekly
2. Bids submitted by government securities dealers, financial and non-financial corporations and individuals 3. Individual competetive bidders limited to 35% total issue size, can submit more than one bid, allocations made beginning with highest bidder |
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Secondary Markets for T-Bills
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-The largest of any US money market security
-Approx. 30 financial institutions "make" a market in T-Bills by buying and selling securities for their own accounts and by trading for their customers, including depository institutions, insurance companies, pension funds, etc. -T bills are the FOMC (Federal Open Market Committee)'s instrument of choice for its open market operations |
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TBill Rates and Yield
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-No interest paid on Tbills (coupon rate is zero), issued at a discount from their par (or face) value
-Tbill rates quoted in the WSJ |
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Discount Yield
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the price the dealers are willing to pay TBill holders to purchase their T-bills for (from?) them
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Asked
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The discount yield based on the current purchase price set by dealers that is available to investors
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Spread
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The percentage difference in the ask and bid yield, part of transaction cost, the profit for the dealers
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Calculating Tbill Yields from Discount Rates
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i>tbill(discount yield) = (face value - purchase price)/Face value x 360/(number of days until t-bill matures)
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Another Federal Funds Definition
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Short term funds transferred between FI's, usually for a period of one day
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Federal Funds Rate
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-The interest rate for borrowing fed funds
-A focus or target rate in the conduct of monetary policy |
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Federal Funds Yield
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-Single-payment loans - they pay interest only once, at maturity
-Fed fund transactions take the form of short term (mostly overnight) unsecured loans |
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Trading in the Fed Funds Market
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-Commercial banks conduct the majority of transactions in the fed funds market
-Banks with excess reserves lend fed funds, while banks with deficient reserves borrow fed funds -Fed funds transactions can be initiated by either the lending or borrowing institution or handled through a broker |
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Repurchase Agreement Definition II: Attack of the Clones
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An agreement involving the sale of securities by one party to another with a promise to repurchase the securities at a specified price on a specified date
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"Essentially" Def. of Fed Fund
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A collateralized fed funds loan with collateral in the form of securities (e.g. T-bills and Fannie Mae securities)
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Reverse Repo Agreement
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involves the purchase of securities between parties with the promise to sell them back at a given date in the future
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Trading Process for Repurchase Agreements
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-Arranged either directly between two parties or with the help of brokers and dealers
-The repo buyer arranges to purchase T-bills from the repo seller with an agreement that the seller will repurchase the T-bills within a stated period of time |
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Commercial Paper Another Definition
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An unsecured ST promissory note issued by a corporation to raise ST cash, often to finance working cap. requirements
-The largest (in terms of dollar value) of the money market instruements |
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General Denominations of Commercial Paper
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Generally sold in denom.'s of $100,000, $250,000, and $1M with maturities of 1-270 days (if maturity is greater than 270 days then SEC requires registration)
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Secondary market of Commercial Paper
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Generally held until maturity so there is not an active secondary market
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Trading Process for Commercial Paper
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-CP's are sold either directly to investors (25%) or indirectly through brokers and dealers such as investment banks or major bank subsidiaries
-Selling through brokers is more expensive for issuer due to underwriting costs |
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Negotiable Certificates of Deposit Definition Again
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A bank-isssued time deposit that specifies an interest rate and maturity date and is negotiable in the secondary market
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Neg. CD's are bearer instruments -- what does that mean?
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Whoever holds the CD when it matures receives the principal and interest
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Denominations of Neg. CD's
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Range form $100,000 to $10M, $1M being the most common
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Who often purchases Neg. CD's
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Often purchased by money market mutual funds with pools of funds from individual investors
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Trading Process for Negotiable CD's
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-Banks issung NCDs post daily rates for the more popular maturities and subject to funding needs, tries to sell to investors who are likely to hold them as investments rather than sell them to the secondary market
-In some cases, the bank and investor negotiate the size, rate, and maturity |
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NCD Secondary Market
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Consists of a linked network of approximately 15 brokers and allows investors to buy existing CD's rather than new issues
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More info on Banker's Acceptances
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-A time draft payable to a seller of goods with payment guaranteed by a bank
-Arise form international trade transactions and are used to finance trade in goods that have yet to be shipped froma foreign exporter (seller) to a domestic importer (buyer) --Foreign exporters prefer that banks act as guarantors for payment before sending goods to importer |
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T Bills Principal Facts
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Issuer: US Treasury
Investor: FRS, Comm. Banks, Brokers and dealers, Other FIs, Coprorations |
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Federal Funds Principal Facts
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Issuer: Commercial Banks
Investors: Commercial Banks |
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Repurchase Agreements Principal Facts
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Issuer: FRS, Commercial Banks, Brokers and dealers, Other FI's
Investors: FRS, Commercial Banks, Brokers and Dealers, Other FI's, corps |
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Commercial Paper Principal Facts
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Issuer: Commercial Banks, Other FI's, Corporations
Investor: Brokers and Dealers, corporations |
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Negotiable CD's Principal Facts
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Issuer: Commercial Banks
Investor: Brokers and dealers, corporations, other FI's |
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Banker's Acceptances
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Issuer: Commercial Banks
Investors: Commercial Banks, corporations, brokers and dealers |
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Bonds Definition
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A promise to make periodic coupon payments and to repay principal at maturity; breech of this promise is an event of default
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Maturities of bonds and their market classification
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Carry original maturities of greater than one year so bonds are instruments of the capital markets
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Issuers of Bonds
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Corporations and Government units
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Five Characteristic of Treasury notes and Bonds
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1. T-notes and T-bonds issued by the US Treasury to finance the national debt and toehr federal government expenditures
2. Backed by the full faith and credit of the US government and are default risk free 3. Pay relatively low rates of interest (yields to maturity) 4. Given their longer maturity, not entirely risk free due to interest rate fluctuations 5. Pay coupon interest (semi annually) |
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Treasury Strips (4 characteristics)
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1. Treasury security in which the individual interest payments are separated from the principal payment
2. Effectively creates sets of securities -- one for each semiannual interest payment and one for the final principal payment 3. Often referred to as "treasury zero coupon bonds" 4. Created by the US treasury in response to seperate trading of treasury security principal and interest developed by securities firms; only available through FI's and government securities brokers |
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Primary Market in Treasury Notes and Bonds
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Similar to the primary market T-bill sales, the Treasury sells T-notes and bonds through competitive and noncompetitive auctions
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Secondary Market in Treasury Notes and bonds
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-Most secondary market trading occurs directly through brokers and dealers
-WSJ shows full list of Treasury securities that trade daily |
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Definition of Muni bonds
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Securities issued by state and local governments to fund either temporary imbalances between operating expenditures and receipts or to finance LT capital outlays for activities such as school construction, public utility construciton, or transport systems
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Source of repayment for munis
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Tax receipts or revenues generated
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Why are munis attractive and to whom
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Attractive to household investors b/c interest (but not cap gains) are tax exempt
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After tax (equivalent tax exempt) rate of return on a taxable bond
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After tax raate of return = before tax rate x (1-income tax rate of the marginal bond holder)
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Types of muni bonds
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1. General Obligation bonds
2. Revenue bonds |
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General Obligation Bonds
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Bonds backed by the full faith and credit of the issuer
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Revenue Bonds
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Bonds sold to finance a specific revenue generating project and are backed by cash flows from that project
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Primary Market Placement Choices for Munis
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1. General Public Offering
2. Rule 144A Placement |
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General Public Offering Munis
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-underwriter is selected either by negotiation or by competitive bidding
-the underwriter offers the bonds to the general public |
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Rule 144A Placement Munis
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Bonds are sold on a semi-private basis to qualified investors (generally FI's)
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Contracting choices with the underwriter for munis
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1. Firm commitment underwriting
2. Best efforts underwriting |
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Firm Commitment Underwriting
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The issuer of securities in which the investment bank guarantees the corp. a price for newly issued securities by buying the whole issue at a fixed price from the corporate issuer than seeks to resell to suppliers of funds (investors) at a higher price
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Best Efforts underwriting
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The issue of securities in which the underwriter does not guarantee a price to the issuer and acts more as a placing or distribution agent, bank acts as agent on a fee basis related to its success in placing the issue
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Secondary Market for munis
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Secondary market is thin (i.e. are relatively infrequent) due to a lack of information on bond issuers, who are generally much smaller than corporate bond issuers
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Corporate Bonds Definition
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All LT bonds issued by corporations
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Denominations of corp bonds
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Min. denom. publicly traded corp. bonds is $1,000
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Other (2) characteristics of Corporate bonds
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-Generally pay interest semi-annually
-Bind indenture: legal contract that specifies the rights and obligations of the bond issuer and the bond holder |
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Types (4) of corporate bonds
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1. mortgage bonds
2. equipment trust certificates 3. debentures 4. subordinated debentures 5. convertible bonds 6. stock warrant 7. callable bonds 8. sinking fund bonds |
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Mortgage bonds
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Issued to finance specific projects whcih are pledged collateral
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Equipment Trust Certificates
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bonds collateralized with tangible non-real estate property
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Debentures
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Backed solely by the general credit of the issuing firm and unsecured by specific assets or collateral
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Subordinated debentures
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unsecured debentures that are junior in their rights to mortgage bonds and regular debentures
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Convertible bonds
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may be exchanged for another security of the issuing firm at the discretion of the bond holder
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stock warrant
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give the bond holder an opportunity to purchase common stock at a specified price up to a specified date
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callable bonds
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allow the issuer to force the bond holder to sell the bond back to the issuer at a price above the par value (call price)
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Sinking Fund Bonds
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Bonds that include a requirement that the issuer retire a certain amount of the bond issue each year
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Primary Markets for corp bonds
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Primary sales of corp bonds occur through either a public sale (issue) or a private placement similar to muni bonds
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Secondary markets for corp bonds
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1. The exchange market (e.g. the NYSE)
2. The over the counter (OTC) market -OTC electronic market dominates trading in corp bonds |
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Bond ratings (4) characteristics
[Bond credit ratings on slides 19 and 20] |
1. Bonds are rated by the issuer's default risk
2. Large bond investors, traders and managers evaluate default risk by analyzing the issuer's financial ratios and security prices 3. Two major bond rating agencies are Moody's and Standard and Poor's (S&P) 4. Bonds Assigned A letter grade based on perceived probability of issuer default |
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Bond Market Indexes
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-Managed by major investment banks
-Reflect both the monthly capital gain and loss on bonds plus any interest (coupon) income earned -Changes in values of the broad market indexes can be used by bond traders to evaluate changes in the investment attractiveness of bonds of different types and maturities |
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Bond Market Participants
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-The major issuers of debt market securities are federal, state, and local governments and corporations
-The major purchasers of capital market securities are households, businesses, government units and foreign investors -Businesses and financial firms (e.g. banks, insurance companies, mutual funds) are the major suppliers of funds for all three types of bonds |