Debt Securities

Question 1

Different Types of Debt Securities

Answer 1

• Bonds
• Money Market Instruments

Question 2

Bonds

Answer 2

• Represents the issuer’s indebtedness
• A contract between the borrower (issuer) and the lender (investor)
• Terms of the loan are in a debt INDENTURE or DEED OF TRUST
• Specific amount by a specific date with a specific rate of interest
• Rate of interest NEVER changes during the life of the bond
• Fixed income investment

Question 3

Money Market Instruments

Answer 3

• The market for buying & selling short term loanable funs in the form of securities & loans
• High quality investment (low risk)
• Because of their safety & liquidity their yields are low
• Maturity dates of one year or less (most are 6 mos or less)
• Most are issued at a discount
• Most do not pay interest (the difference between discount price & par value is considered the interest to use the funds)
• DVP

Question 4

Characteristics or Structure Common to Most Debt Securities

Answer 4

• INVERSE RELATIONSHIP BETWEEN INTERESTS RATES & PRICE OF BOND (when one goes up the other goes down - HOWEVER - the stated rate & interest payments on a bond never change)
• INDENTURE (legal doc describing the legal conditions of the bond)
• NEGOTIABILITY (bonds & MM securities are highly transferrable)
• SPECIFIED MATURITY DATE (debt securities are redeemed (paid back) by the issuer on a specific date)
• PAYMENT OF INTEREST (bond interest is generally paid semiannually based on stated coupon rate; MM instruments are issued at a discount of their face/par value with the difference paid at maturity)
• ACCRUED INTEREST (buyer pays the seller the amount of interest that has accrued since the last interest payment bc most are paid every six months)
• PAYING AGENT (usually the trust department of a bank or treasurer of the issuers - they transmit payments)
• PRICING/QUOTES (most cases bonds are quoted as a percentage of par or face value)
• TRUSTEE (represents the investors - often the paying agent)
• SECURED OR UNSECURED (an issuer may choose to place specific assets as collateral to the loan (adds safety) or may choose to not list a specific asset & is trusted strictly on credit standing)
  -CALLABLE or NONCALLABLE (call feature permits the issuer to redeem its bonds (pay off the principal) before maturity if it wants)
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Question 5

Types of Money Market Instruments

Answer 5

• US Treasury Bills (safest MM security; 4, 8, 13,26 & 52 weeks maturity terms, never longer than 52 weeks
• COMMERCIAL PAPER / CP (short-term unsecured paper issued by corporations primarily used to raise capital; maturity is 1-270 days with most maturing in 90 days)
• NEGOTIABLE CERTIFICATE OF DEPSOIT / CD (minimum size $100K but most common is $1M; unsecured time deposits; does pay interest semi-annually & not sold at a discount)
• BANKERS’ ACCEPTANCE (short term draft with a specified payment date drawn on the bank; bank is responsible to make payment at maturity regardless; used often in import/export)
• REPURCHASE AGREEMENTS (sale of securities with an agreement to repurchase them at a higher price on an agreed upon future date)

Question 6

Money Market Instruments Sold at a Discount and No Interest Payments

Answer 6

• T Bills
• Commercial Paper (CP)
• Bankers’ Acceptance (BAs)
• Repurchase Agreements
• • Negotiable Certificate of Deposit is the only MM instrument NOT issued at a discount and pays periodic interest