Ch 4: Debt Securities Flashcards
3 major issuers of debt sec
- US gov (largest issuer of debt securities)
- Corporations - borrow $ to finance their ops
- State gov and those political entities that are subdivision of s ate; state and local politicala entities are munis
debt capital
money loaned to an issuer by investors purchasing that issuer’s bonds
bond
issuer’s indebtedness
indenture
terms of loan are expressed in a doc known as the bond’s indenture
also called “deed of trust”
states the issuer’s
- obligation to pay back x amt of money on x date
- issuer’s obligation to pay investor x rate of interest
- any collateral pledged as security for the loan and all other pertinent details
LT debt capital
LT debt is money borrowed for min 5 yrs, altho usually it’s 20-30 yrs
money market
market for buying and selling ST loanable funds
called “money mkt” bc that’s what’s traded - money! not cash
normally issued at a discount and DO NOT pay intrest. Principle amt of loan is repaid at maturity.
mm instrumetns DO NOT have an indenture
mm instruments maturity date
1 yr or less; most are less than 6 months
Why issue at a discount?
most money market instrumetns have a maturiy of less than 6 months, so the admin coss of paying out interest would be very high. Therefore, the solution is to issue secutiy at a discount with the investor getting back par at matuirty.
Difference between price paid and the maturity value is considered interest.
primary purchasers of money market securities?
institutions (including banks, insurance cos and mm mutual funds)
industry best practices rec the use of delivery vs payment (DVP) on the purchase of these sec
legal doc describing legaal conditions of the bond?
indenture
Trust Indenture Act deals with…
corporate bonds
negoatiability
both bonds and mm securities are readily transferrable.
This enables investors to sell sec before maturity date.
SECONDARY MARKET TRADING IS LESS COMMON THE MONEY MARKET BC OF THE SHORT MATURITIES.
Payment of interest (frequency?)
interest generally paid semiannaully for bonds
Accrued interst
investor who sells a bond BEFORE semiannnual interst payment? buyer pays seller the amt of interst that has accrued since the last interest payment.
Then, on the next payment date, new owner received the full 6 months of interest.
paying agent
usually a trsut dept of a bank
role of the paaying agent is to transmit paymetns of interest and pricniipal to the investors. Bc most mm instruments are issued at a discount, apying agent only repays the principal.
Pricing of bonds are quoted as…
% of par or face value
Trustee
usually a fin institution (ie. trust company)
often serves as the paying agent
trustee reps the investors; makes sure the borrower lives up to the terms of the loan and its responsibilities.
Callable vs Noncallable
call feature permits the issuer to redeem its bonds (pay off principal) BEFORE matuirty if it so desires.
Call feature is most often exercised when int rates are borrwoing by issuign enw bonds at lower rates prevailing in the market nd using those proceeds to call in the old bonds with their higher coupons.
similar to refunding!
cheapest way for issuer to retire its debt?
buy it in the open market
call provision
if buying from the open market doesn’t work, the issuer invokes a call provision.
“in whole call” meaning the issuer calls the entire issue.
In other cases, the issuer might have surplus funds. Rather than paying interest on the debt, it’ll call in a portion of the bonds (partial call). When this is done, the bonds to be called are usually selected randomly.
(partial calls are similar to someone who uses extra money to pay down credit card debt; it’s not enough to completely pay it off, but paying off a portion certainly saves money)
- usually you pay down the accts carrying the highest interest cost. If the issuer has several callable bonds outstanding, i would do the same thing (aka call the issue with the highest coupons first)
Bc of the ST nature, it’s rare to see a callable mm instrument.
