Chapter 4: Debt Instruments Flashcards
1
Q
Moody’s and S&P’s Ratings
A
S&P Moody’s
AAA Aaa Investment Grade - can be purchased by banks
AA Aa
A A
BBB Baa
BB Ba Non-investment Grade
B B
C Caa
D
S&P uses a plus and minus scale on their ratings.
For example, A+ is better than an A rating and A- is lower than an A rating.
Moody’s uses a 1, 2, 3 scale.
For example, A1 is better than A2 and A2 is better than A3
2
Q
Credit risk
A
The risk that an issuer may become unable to meet interest or principal payment on its bonds.
A.k.a. business risk or default risk.
Evaluate risk by checking credit rating, the Moodys or S&P
3
Q
Inflation risk
A
The risk that an investment value is negatively affected by inflation.
A.k.a. purchasing power risk or constant dollar risk.
4
Q
Reinvestment risk
A
The risk that in a falling interest rate environment, bond proceeds must be reinvested at lower rates, reducing the investor’s yield.
Example: as bonds in a bond fund mature, if current rates are lower than preceding rates, new bonds are purchased with a lower return. Reduces income.
5
Q
Zero-coupon bonds and risk
A
Bonds that are purchased at a steep discount, and then are paid out at par at maturity. There are no payments throughout the term of the bond. Guarantees a yield over the life of the bond, thus eliminates some types of risk.
6
Q
Call risk
A
The risk that a callable bond will be redeemed by the issuer before maturity
7
Q
Currency risk
A
The risk that changes in the US dollar/foreign currency exchange rate negatively impact to security.
Applies to a security market value is denominated in a foreign currency, or who’s interest are dividends are paid in a foreign currency.
8
Q
Liquidity risk
A
The risk that an asset cannot be sold quickly, or that selling quickly will result in a substantial loss.
Infrequently traded securities have more liquidity risk than heavily trading securities, because there is a smaller market for them.
9
Q
Marketability risk
A
The risk of being unable to buy or sell a security that’s sustaining a loss. Applies to thinly traded securities.
Similar to liquidity risk, except that market ability is not concerned with the price, more the ability to buy and sell.
10
Q
Legislative risk
A
The risk that changes in the law will negatively impact the value of security.
Example: an adverse ruling by the FDA concerning a new drug and caused the stock of the drugs manufacturer to decline in value.
A.k.a. legal risk or legislative risk.
11
Q
Term bonds
A
All bonds are issued at once, and mature at once. Priced as a percentage /points of par value.
Example: term bond quote of 98 means 98% of par value, or $980.
12
Q
Serial bonds
A
All of the bonds are issued at once, but they mature in increments over several years. Example: a $1 million bond matures at $200,000 increments over five years.
Can be quoted, as either percentage yield or basis points.
Note that bonds of differing maturity dates in the same issue, may have different yields based on the number of years to maturity.
13
Q
Nominal yield, a.k.a. coupon rate, a.k.a. stated rate
A
The rate which the issuing corporation has contracted to pay interest throughout the life of the bond. Never changes. Will pay the stated interest rate until the bond matures and is extinguished.
14
Q
Current yield
A
Divide the annual interest by the current market value, rather than the par value of the bond. Example:
$1000 face value, current yield 10%, price $900
Current yield = $100/$900 = 11.11%
15
Q
Yield to maturity
A
Is a percentage. Total return that would be realized if the bond were held until the maturity date. A.k.a., the overall return for the investor measures the total performance of the bond.
16
Q
Yield to call
A
The performance of a callable bond from purchase to the call date. 
17
Q
YMCA
A
Y - current yield
M - yield to maturity
CA - yield to call
18
Q
Quoting bond rates to customers
A
Must quote the lowest rate to a customer. Remember YMCA.
Lowest will be:
-Yield to call for bond trading at a premium
-Nominal yield for bond trading at a discount
19
Q
Standardized yield (a.k.a. SEC yield)
A
Measure of the current net market yields on a bond’s investment portfolio. Based on the net investment income for the 30 day period ending on the last day of the previous month, divided by the highest offering price on that last day,
OR
The SEC yield is a standard yield calculation developed for fair comparison of bonds. The yield calculation shows investors what they would earn in yield over the course of a 12-month period if the fund continued earning the same rate for the rest of the year.
20
Q
Accrued interest
A
Bond interest is paid in arrears in six month periods.
If a bond is sold somewhere in the middle of the six month period, the buyer owes the seller the first portion of the interest within that period. Thus, the buyer is paying the seller for the bond plus accrued interest from the current six month period.
Accrual period is the last interest payment date up to, but not including, the settlement date.
21
Q
Bond settlements and accrual period differences
A
Corporate, municipal, and government agency bonds = T+2. To calculate the accrual period, every month is considered to have 30 days in every year has 360 days.
Government notes and bonds = T+1. To calculate the accrual period, assume the actual number of days in the month and actual number of days in the year.
22
Q
Secured corporate bonds
A
Are backed by collateral. Ex: Mortgage bonds are backed by liens or mortgages on real property.
– Open-end bond: allows the corporation to issue subsequent bonds secured by the same property at a later time. New bonds have equal claim to the collateral, so more bonds have claim to the same collateral, thus are more risky.
- Closed-end bond: specify maximum indebtedness issued against the same lien. Are considered safer.
23
Q
Bond trust indenture
A
Contract between the issuer and the trustee, who acts on behalf of the bond holders. Must designate open versus closed end bonds.
24
Q
Equipment trust certificates
A
Bonds are secured by equipment, usually railroads and airlines. Are historically secure.
25
Collateral trust certificates
Backed by securities of a different issuer. Example: Dell owns shares of Intel stock. Dell might use the Intel stock to secure the bond.
26
Unsecured bond (a.k.a., debentures)
No collateral, backed by full faith and credit of the issuer.
27
Subordinated debentures
Junior in claim to all other bonds during bankruptcy. Since they have reduced claim right, they are riskier and thus have a higher yield
28
Guaranteed bond
A debenture bond. Has been cosigned by another entity, who guarantees the bond in the event of default by the issuer.
Is essentially backed by two promises, rather than one.
29
Convertible bond
Convertible into common stock of the issue were at the bond holders discretion. Thus, value of the bond ends up tied to the stock price, and they are proportionally impacted.
Come with an established, unchanging conversion ratio. Thus, the number of shares that are available never changes.
30
Step up bond (a.k.a. step coupon bond)
Initial nominal rate increases to a pre-specified higher rate at a certain time. Example: 10 year bond pays 4% for the first three years, then increases to 6% for the remainder.
31
Income bond
Created by debt renegotiation or bankruptcy proceeding. Not suitable for most investors.
Renegotiated bond terms that no longer pays semi annual interest and won’t unless the issue are returned to profitability. They have no accrued interest. Highly speculative.
32
Treasury securities
Consist of treasury bills, treasury notes, and treasury bonds.
Considered very safe. Can be marketable, or non-marketable. Non-marketable do not trade in the secondary market and are only redeemed by the issuer.
33
Treasury bills (T bills)
-Sold at a discount. Mature at par.
– Maturities are maximum of a year. Can be four weeks, 13 weeks, 26 weeks and 52 weeks.
– sold via auctions. Four, 13 and 26 is our auction weekly. 52 auction monthly.
– On secondary market, bid will be higher than the ask. The quotes represent a discount from par, so they represent how much is taken off of the par value of the bond to account for her accrued interest.
Example: if the ask is 7.30, the bond is discounted at $73 from par, this the ask price is $927.
34
Treasury notes (T notes)
– Two, three, five and 10 year maturities.
-$1000 par, purchased in denominations of $100
– pay semi annual interest
– 1/32 increments.
35
Treasury bonds (T bonds)
End maturity is greater than 10 years
– $1000 par value, sold in $100 denominations.
– pay semi-annual interest
-quoted in 1/32.
Example: quote of 102.20 is $1026.25
36
TIPS (treasury inflation protected Security)
-Principal is adjusted for inflation per CPI semi annually
– Taxed as ordinary income in year it is adjusted for inflation.
– Five, 10 and 30 year maturities.
The face value is adjusted for inflation and the interest rate is fixed. Assume $1000 TIPS with a 4% interest rate. If inflation is 12%, the face value is adjusted up by $120. 4% interest is paid on $1120. Both the increase in face value and interest earned are taxed. Both the inflation adjustment to the face value and the interest are paid semiannually.
37
STRIPS (Separate Trading of Registered Interest and Principal of Securities)
– Zero coupon bond sold at a discount.
- Sold directly from the US Treasury
-Sold at discount, mature at par
– Accrete in value
– increase in value is considered income
- Backed by full faith and security of the US government
38
Treasury receipts (TRs)
- zero coupon bonds
- sold by broker/dealers
- sold at discount, mature at par
- not backed by full faith and security of US government
39
GNMA
- Government National Mortgage Association
- Buys FHA, VA and Farmer’s Home Administration insured mortgages
- Bonds: Modified mortgage-backed securities with $25k minimum
- Quotes in 1/32s, settle T+2, use 30 days/mo
- Interest: monthly
Government owned within HUD. Only agency that is government guaranteed.
40
FHLB
-Federal Home Loan Bank system
- Government-sponsored
- Loan funds to savings and loans institutions with S&L mortgages as collateral
-Bonds: Par is $10k or higher, are short-term
-Interest is semi-annual
41
FNMA
- Federal National Mortgage Association
- Government-sponsoring enterprise
- Buys government guaranteed/insured mortgages and conventional mortgages from banks
-Bonds: Conventional and short-term discount notes. $10k+ par value
- Interest: Semi-annual
42
FHLMC
-Federal Home Loan Mortgage Association
-Government-sponsored agency
-Buy conventional residential mortgages from financial institutions
- Bonds: “Participation certificates,” pass-through securities with $25k minimum.
- Interest: Semi-annual
43
SLMC
- Student Loan Mortgage Corporation
- Provides money for student loans
-Originates, services and collects private education loans
– Government sponsored enterprise
44
FHL Banks (federal home loan bank system)
– Government sponsored enterprise
End supports mortgage, lending and related community investment on the part of its members, including commercial banks, credit unions, thrift, institutions, insurance agencies, and certified community development institutions
45
CMOs(collateralized mortgage obligations.)
– Created from pool of mortgage backed securities from GSEs
– Have interest risk and pre-payment risk.
– provide investor with principal and interest monthly.
– are divided into slices called tranches. Each tranch is its own separately traded bond.
– Safest tranch is PAC, or planned amortization class. Have a more certain maturity date, so less pre-payment or extension risk.
– TAC, or targeted amortization class, has higher yield for more risk.
– most risk and the highest yield is Z tranche. Has no interest or principal until all tranches have been paid off.
46
ABS (Asset backed security)
Backed by short term loans on assets other than real estate, such as auto loans or credit cards.
A type of CMO
47
CMO communication requirements
– Must include the term collateralized mortgage obligation.
– may not compare the CMO to other investment vehicles, including CDs
– must disclose that government agency backing applies only to the face value of the CMO, and not to any other premium paid.
– Must disclose that yield and life of the CMO will fluctuate based on interest rates and the actual rate at which mortgage holders pre-pay the underlying mortgages
48
CMO sales requirements
must offer educational material before selling a CMO that includes:
– characteristics, risks and structure of the CMO.
- relationship between mortgage loans and mortgage securities
– questions the investor should ask.
– glossary of terms.
49
Collateralized debt obligations (CDOs)
- backed by pool of debt, such as loans, bonds, or mortgages.
– higher risk of default if they have a junior tranche
- Can be offered with call or put features, requiring purchase by, or selling to the issuer, respectively.
50
Eurobonds and Eurodollar bonds
Eurodollar securities, whether notes, bonds, or CDs, are based on U.S. dollars in foreign repositories, mostly European. The Eurodollar bond market is centered in London.
- Any entity can issue Eurodollar securities: foreign corporations, domestic corporations, or municipalities, **EXCEPT the U.S. government.**
- Eurodollar bonds range from 5-10 years in maturity, pay interest once a year, and are not subject to withholding taxes.
51
Advantages of eurodollar bonds
-No foreign exchange risk for U.S. issuers (since bonds are denominated in U.S. dollars);
-Lower interest rates in comparison with domestic rates; and
-Lower issuance expenses (no SEC registration requirements).
*The U.S. federal government cannot issue Eurodollar bonds.
52
Commercial paper
– Unsecured, corporate notes issued by blue chip companies.
– key contributor to money market accounts.
– Rated P1, P2, and P3; P one is highest quality.
– Typically 30 to 270 day notes
53
Money market debt
– Short term debt of high quality issue by corporations and municipalities.
– commercial paper, T-bills or government paper, and bankers' acceptances, which are also called letters of credit, or import/export notes.
– includes re-purchase agreement, typically collateralized overnight lending
54
Taxation of municipal bonds - interest
- interest earnings from municipal bonds are not taxed at the federal level.
– interest earned from municipal bonds are not taxed within the state they are issued. However, a a muni issued in a different state is taxed. For example, a Massachusetts resident with a New Hampshire bond is taxed in Massachusetts on the interest.
States don’t tax themselves. They tax other states. Encourages purchasing in the state.
55
Taxation of municipal bonds – secondary market
Gains on bonds sold on the secondary market are taxed at all levels.
56
Comparing tax free bonds to corporate bonds
Investor is in 30% tax bracket. Wants to compare 4% municipal bond to equivalent corporate bond.
– 4%/70% = 5.7%
57
Amortization
- Applies when bond is purchased at a premium.
-Book value incrementally decreases each year until reaching par at maturity
Ex: 10-year bond purchased at 107, means $70 premium. Book value will decrease by $7/year until maturity at par ($1,000).
If sold at 106 in year five: Seller gets $1,060. Book value is $1,035 (=$1,070 - ($7/yr x 5 yrs)). Thus capital gain is $35 (=$1,070 - $1,035).
58
Accretion
-Applies when zero-interest bond (or original issue discount (OID) bond) is purchased, which will be at a discount to par. Each year, bond incrementally increases in value until reaching par at maturity.
Ex: 10-yr zero-interest bond purchased at $600. Will mature at $1,000 par. Interest is $400 over 10 yrs, thus $40 accretion per year.
If sold for $800 in year 3. Book value is $720 (=$600 + ($40/year x 3 yrs)). Capital gain is $80 (=$800 - $720).
59
Refunding
Bonds must be callable. Issuer wants to reduce cost of borrowing (interest rates dropped) or be released from a restrictive covenant = refunding. Two ways: 1) Issue new bonds at lower rate or issue new bonds sans covenant. 2) Exchange outstanding bonds with a new bond.
The new bonds pay off the existing bonds.
60
Advance Refunding
Ex: Bond at 8% with two more years of call protection. Rates fall to 5%. Issuer issues new 5% bond now, proceeds fund call back of 8% in two years. 8% bond is now called "defeased" and will definitely be called in two years, thus is now a two year bond. Is now AAA rated because it is escrow backed.
61
Bond Put/Call Options
- Bond has put feature, allows buyer to sell back at par. Protects against rising interest rates, thus appeals to buyer, thus lower rate at issue.
- Call feature - benefits issuer, thus higher rate at issue.
62
General Obligation bonds (GO)
-Backed by full faith and credit of issuer, paid by income, sales or real estate (ad valorem) taxes.
-Require voter approval
Ex: 1/2% sales tax to support bond debt
-Must be underwritten by competitive bid process.
63
Revenue bonds
- Self-supporting; Provide funds from revenues like hospitals, tolls or arenas. Indenture may include protective covenants.
- Not backed by full faith and credit
-Must be underwritten by competitive bid process.
- Require feasibility studies to evaluate viability
64
Double-barreled debt
A form of GO bond debt backed by both revenue and taxes
65
Moral obligation bonds
State legislature can appropriate funds to pay off bonds. Not a legal obligation, but a moral obligation.
Ex: Hospital in rural, underserved area. If hospital defaults, community suffers.
66
Attributes impacting evaluation of GO and/or revenue bonds
- Overall debt - self-supporting debt = net direct debt
- Income per capita
- Local economy
- Issuer's ability to collect taxes
- Feasibility studies of revenue bonds: income should double debt
67
Industrial Development Revenue Bonds (IDR)
- Are usually taxable municipal bonds, build a stadium or parking lots.
- Municipal bonds that are usually backed by a corporation, thus are considered private purpose bonds (thus taxable).
- Interest must be calculated twice: as regular tax rates and as AMT. Owner pays the higher of the two.
-Have indentures, like all revenue bonds
68
Bond indenture
List of covenants (i.e. rules) between the issuer and trustee, who acts on behalf of the bondholders
69
Rate covenant
Issuer promises to send user rates so that they are sufficient to pay interest and repay principle in the bonds.
For revenue bonds
70
Closed-end or open-end covenant
Addresses of future issues of new bonds. If the revenues from the facility can support more new bonds, determines whether bonds are senior or junior to original bonds.
Open end - new bonds can be issued with the same lien priority and same collateral. Requires additional bond test.
Closed-end - additional bonds are junior/subordinated level to original bonds.
71
Maintenance covenant
Issuer promises to maintain the facility to optimize revenue to pay bond holders.
72
Catastrophe covenant
Extraordinary event, like natural disaster, as you are collecting on insurance policy, which will pay off the existing bonds.
Could issue a new bonds to rebuild.
73
Sinking fund covenant
Is an escrow account providing liquidity to pay back debt. Issuer must periodically contribute to the fund, which may only be used to retire the bonds.
If there is a partial call feature, is executed through random selection.
If sinking fund grows rapidly, mandatory bond payment will be exercised, because issuer cannot make money on a sinking fund.
74
Bond indenture: the flow of funds
1) Net revenue pledge - operations and maintenance are paid first, then debt is serviced
2) Gross revenue pledge – bond debt paid first, then operating and maintenance expenses
75
MIG Ratings
Municipal notes, or short-term munis, are rated by Moody's rating service as MIG 1, 2 or 3. MIG 1 is the highest; MIG is Moody's investment (short-term) grade. The following are examples of municipal notes:
TANs (tax anticipation notes) — issued in anticipation of a future tax collection);
TANs are MIG 1 because of their tax backing;
RANs (revenue anticipation notes) — issued in anticipation of facility revenues);
BANs (bond anticipation notes) — in anticipation of issuing a bond in the future); the riskiest of the group;
TRANs (tax and revenue anticipated notes);
VRNs (variable rate notes) — used to finance short-term needs of the municipality, such as the purchase of computers; with VRNs, the stated rate will actually fluctuate;
Tax-exempt commercial paper is another form of financing the municipality’s short-term cash needs. With short-term tax-exempt commercial paper, there is a fixed interest rate; and
GANs (grant anticipation notes) — issued with an anticipation of receiving grant money.
76
Auction rate securities (ARSs)
issued by municipalities, corporations, and certain government agencies. An ARS is a long-term bond with an interest rate that regularly resets through a Dutch auction. (A Dutch auction starts with a high price that is reduced until a buyer consents.) Because of the regularly resetting interest rate, the ARS should trade as a short-term bond. However, ARSs are not money market securities, and are not necessarily liquid.
77
Build America Bonds (BABs)
Taxable municipal bonds which offer either a federal subsidy to the issuer or a tax credit to the investor. They were created by the American Recovery and Reinvestment Act of 2009 and were issued from February 2009 until December 2010. They trade in the secondary market. BABs are issued to fund public projects, such as highways.
78
Bank qualified bonds
for qualified small issuers and the amount of money raised cannot exceed $10 million. In communities with a qualified small issuer, the local bank may deduct up to 80% of the carrying cost when investing in the bonds or when they place them in their inventory to resell to investors.
79
Certificates of participation (COPs)
financial instruments that represent a proportionate share in a specific pledged revenue stream, usually lease payments by a municipal or other government entity issuer. In other words, the issuer creates a certificate of participation. Unlike receiving interest on a bond, the investors receive a stream of income based on the lease revenues associated with the offering.
80
Municipal Fund securities
- Include 529s, ABLE accounts and local government investment pools (LGIPs)
- Regulated by MSRB
– May include stocks, bonds and government securities
- Must report offering-related info to MSRB within 60 days of each semi annual reporting period (06.30 and 12.31).
- must report performance data annually, within 60 days of December 31
81
529 Plans
-State sponsored
-Growth is tax deferred, withdrawals are tax-free for qualified expenses
-Up to $10k annually for elementary, secondary or religious school (public or private)
- 10% penalty on a non-qualified withdrawals
-contributions are considered gifts, gift tax rules limit to $17k per donor ($34k per couple)
- can make up to 5 years of contributions gift tax free if no other contributions are made in those 5 years ($85k single, $170k couple)
82
Local government investment pools (LGIPs)
An investment pool established by a state or local governmental entity to invest public funds. Benefits include protection of principal and cash management.
Are short term investments with little volatility to address immediate- to short-term needs.
The pools typically combine the cash of participating jurisdictions and invest in securities that meet the requirements of specific state laws relative to government investments. The pooling of funds enables participants to take advantage of economies of scale.
83
Types of LGIP investments
Obligations issued or guaranteed by the U.S. government or related agency;
Negotiable certificates of deposit from domestic banks;
Commercial paper;
Corporate notes;
Money market mutual funds that are registered with the SEC; and
Municipal obligations issued by state and local governments.
84
ABLE Accounts (aka 529A accounts)
-allows disabled people to save money for disability-related expenses with tax advantages.
– disabled person is owner and beneficiary.
-Annual contribution is $17k; total contribution limits vary by state
- 529 accounts can roll $17k into ABLE annually until 01.01.2026 if beneficiaries on the accounts match
-growth is tax deferred, qualified expenses are tax free
– Education, transportation assistance, housing, technology, etc.
- disability must have occurred prior to 26. If not already under SSI and/or SSDI benefits, must be certified as a blind or disabled, with written diagnosis from physician to get an ABLE account
-Can have up to $100,000 in account and does not impact Medicaid or SSI eligibility
85
Municipal bond underwriting basics
-Involves broker/dealers acting as underwriters, may also involve broker/dealers acting as adviser to the issuer and being paid in fees. If both, can create conflict of interest..
-If underwriting after competitive bid, B/D a taint as both adviser and underwriter must simply disclose this to any investors.
-If selected as underwriter by negotiation, B/D who been serving as adviser must:
-Terminate as adviser, in writing
-Disclose total compensation as both underwriter and adviser
-State in writing to issuer that there is strong potential for conflict of interest in dual capacity.
Associated disclosure can be on preliminary official statement, official statement or bond confirmation.
-Issuer must disclose any control relationship between issuer and underwriter. Ex: County assessor works for the underwrite - must be disclosed.
1. Issue a resolution
2. Get legal opinion on bonds
3. Select underwriter - by either negotiation or bid
-Invitations to bid are posted via “official notice of sale” in the Daily Bond Buyer. Lowest bidder will win underwriter rights (and will profit off each sale)
4. Make disclosures or withdraw from adviser capacity, if necessary
5. Bond contract - includes resolution, indentures (if any), etc.
6. Form syndicate with syndicate agreement (details relative fees)
7. Sell!
86
Legal opinion
In municipal underwriting, municipality must get a legal opinion from issuer’s attorney. Must cover, legal authority to issue, verify tax exemptions, and whether e lemony from SEC registration.
Unqualified (aka clean) - all is well
Qualified - issues are identified
If missing a legal opinion, bond trades “ex-legal.”
87
Daily Bond Buyer
Primary muni market publication. Info includes:
-30-day visible supply - what’s coming to market in next 30 days
-Placement ratio -= bonds placed/bonds offered previous week
-Revdex = yield of 25 30-year revenue bonds, mixed industries and credit ratings
-GO Index = yield of 20 20-year GO bonds
-Bond Buyer Municipal Index (aka 40 Bond Index) = Avg. price of 40 newly issued 20-year bonds.
-11 Bond Index = 11 20-year GO bonds with AA ratings; used a benchmark for muni bond yields
88
Munifacts
Wire service that provides the most up-to-date information on any news affecting the municipal industry.
89
Bidding on municipal bond underwriting
Underwriters who read the Daily Bond Buyer respond to an invitation to bid by submitting a competitive bid to the issuer. The winner is the underwriter (or syndicate) who submits the bid resulting in the lowest net interest cost to the issuer. (The true interest cost is actually a superior calculation, because it considers the time value of money.)
The winning underwriter or syndicate then executes the underwriting, and bonds are offered to the public.
90
Compensation of municipal bond underwriting and sales
The municipal underwriting spread is the compensation paid for underwriting.
The takedown is the compensation to the syndicate members. The takedown doesn't include the manager's fee.
So, takedown plus manager's fee = the spread, or the difference between the offered price to the institutional public and the bid price to the issuer. The municipal underwriting spread is typically expressed in points, where 1 point is equal to $10.
91
Components of Takedown - Additional takedown of 1 point
The additional takedown is actually a part of the total takedown.
The additional takedown in a corporate underwriting is called a syndicate fee. The syndicate is functioning as dealer, principal and taking the risk that the underwriting will sell. Thus, the additional takedown is paid to each member of the syndicate according to their bracket or retention, their percentage of the underwriting.
92
Components of a Takedown - Selling concession of 1 1/2 points
The selling concession is paid to syndicate members who sell bonds, and also to the selling group, which has a written selling group agreement. If a syndicate has an 80% retention (or share of the underwriting), then the syndicate is using selling group members to sell 20% of the offering.
If 100,000 bonds are in the offering, the syndicate will sell 80,000 and receive both additional takedown and selling concession on 80,000 bonds. The selling group members will sell 20,000 bonds and receive the selling concession only.
The selling concession and the additional takedown are equal to the total takedown.
93
Bond trading basic concepts
-Munis trade OTC, which is a negotiated market
-Broker/dealer can be agent or principal
-Munis are serial or term. Serial bonds quote in basis points because the bonds have different maturity dates. Term bonds quote as percentage of par.
-Bid wanted/offer wanted values are not binding, they are informational.
-Can request a “working indication”from another dealer to evaluate value in the market; is non-binding
94
Out firm with five minute recall
-Firm quote for specific time, usually an hour. Can be accelerated to as short as five minutes. The five-minute clock only starts once a dealer/market maker informs that seller that they have found a potential buyer.
Price must be honored for those five minutes.
95
Real-Time Transaction Reporting System (RTRS)
MSRB system in which dealers report the sale and purchase of municipal bonds. This system helps provide transparency into the municipal trading market to the public.
96
Electronic Municipal Market Access (EMMA)
-Provides information on municipal issuers to public customers and professionals.
Information available through EMMA includes copies of the official statement as well as last trade information. EMMA's objective is to provide the most current information, thereby promoting transparency in the municipal marketplace.
97
Short-term Obligation Rate Transparency (SHORT) System
Provides industry professionals and public investors with last trade information about instruments with short-term rates. This information is based on input from at least 3 professionals who access SHORT through a password-protected website
98
Eastern account
When a syndicate underwriting a new issue of municipal bonds organizes the syndicate account as an **eastern account** all underwriters must participate in selling any of the bonds that remain unsold.
If one syndicate member does not sell their entire allocation of bonds all of the syndicate members must sell the bonds.
