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Nazim Reza Tauhidul Islam Rafsan Mahtab 16-011 16-071 16-087
16-040
16-035
US treasury Market. Huge amount of treasury securities are sold in recent year to support the deficit.
c)
2. a. b.
Treasury Bills Short term security (up to 1 year) Discounted instrument 4, 13, 26 weeks bill Treasury notes Medium term security (semi annual coupon) 2, 3, 5, 10 years Current interest rate benchmark Treasury bonds 20 - 30 years bonds (Quarterly coupon) suspended in 2001, reissued in 2006 Treasury Inflation Protection Securities (TIPS)
Fixed interest rate with inflation adjusted principal. Holder receive adjusted principal amount at maturity.
c.
3. a. b. 4.
a) b)
Source: US Treasury
2013
1,607.9
7,386.2
1,253.2
860.9
11,108.2
Coupon Stripping
STRIPS: Separate Trading of Registered Interest
and Principal of Securities. Also known as Treasury Zero or Treasury Zero Coupon Coupon paid in Coupon date and Principal Paid in maturity. Reconstitution is possible: Needs all coupons and appropriate principal amount. Reconstitution reflects efficiency through the possibility of arbitrage.
possibility of deflation. Guaranteed real rate of return above inflation. Flight to quality: Foreign purchase of U. S. Security, seeking financial stability. Flight to liquidity: Phenomena of buying newer securities using foreign funds, a run for liquidity.
Market Quotations
Published in The Wall Street Journal and other
newspapers under the headline of Treasury bonds, notes and bills Treasury Strips are quoted in terms of price. Types of strips are indicated asci = coupon strip np = note principal strip bp = bond principal strip
c)
d) e)
months maturity. Pensioner and Paribar Sanchayapatra Bangladesh Prize Bond Investment and Primer bond in USD ($) Savings Banks
Noncompetitive bids:
Submitted by small investors and individuals The amount of purchase indicated No indication of price Limit for biding is:
up to $1 million in bill auction and $5 million in note auction
Competitive bids
Submitted by primary dealers Act for their own account or on behalf of clients Specifies both the amount and price willing to pay Accepted if the bid yields not higher than the stop yield, otherwise rejected
Auction process
Dealer prohibited from bidding both competitive and noncompetitively for its own account in the same auction Competitive bidders are permitted to submit more than one bid No bidder can not bid for more than 35% of the total amount of the security being sold A primary dealer submit bids through Treasury Automated Auction Processing System (TAAPS)
Auction process
Treasury nets out the total amount of noncompetitive tenders allocates the balance to competitive bidders with bids at per below the high yields(stop yields) The Auction is Single price or Dutch auction (bidders awarded the price results from higher yields) Tenders at lower yields accepted in full Bids at higher yields are rejected The Coupon Rate is the higher yield rounded down to the nearest one-eighth
WI treading is in terms of yields Treasury announces the coupon after the auction After announcement, WI trading is price basis rather than a yield basis Securities issued several days after the auction WI trading ends when the new security settles Prior to the settlement, Buyer doesn't have to pay for the purchase
WI Trading affects strategies, as it affects the position going in to auction of buyer Bidders, buying the securities, go into the auction with long positions Seller of securities go into the auction with short positions WI market serves as a price discovering role It provides: Vital information on the strength of demand and on the disparity of bidders views about the market
Short Squeeze
Dealers enters auction with short positions, as they have sold before the auction the security to clients who own the new issue Must cover the short position before the issue date by buying in the WI market or borrow the security on the issue date to make good on delivery Common mechanism used is: The Reverse repurchase agreement, where dealer lends money to the security holder in exchange for use of the security
Short Squeeze
The dealer is still in short in the security and is exposed to the possibility of being unable to purchase it at the anticipated price Here, Dealer caught in a short squeeze Short squeeze occurs when an auction participants gains control of the majority of a certain security and withholds the supply from the cash or repurchase agreement markets
Coupon Rolls
Important part in the process of distributing new treasury securities Coupon Roll Trade:
Dealer purchased an on-the-run treasury security from a customer for the-next-day settlement Simultaneously sells to that customer the same amount of the recently announced new security for forward settlement
Reverse Roll:
A dealer sells an outstanding issue and buys a new security
The roll is the spread between the yield on the new security and that on the outstanding issue in the same maturity segment Give in roll:
indicates that the WI security provides a higher yield than the outstanding issue.
Take in rolls:
The new issue has a lower yield
Coupon Rolls
Dealers use to accommodate customers who have a preference for liquidity Tend to rolls to maintain positions in the current issues Use to position themselves for bidding at upcoming auctions Seek to execute a roll if he is short in the outstanding issue because e anticipated a market decline or has to accommodate customers Executing a roll, Dealer closes the short position on the outstanding issue and creates a short position on the new security. Dealer has an incentive to bid more aggressively at the upcoming auction
Dealer Trading
Dealer distributed information about each issue containsPrice Yield
Dollar value of a basis point Yield value of a 32nd
Dollar value of a basis point or DV01 is the change in the price of a bond resulting from a one basis point change in its yield. Yield value of a 32nd is estimated by calculating the yield to maturity if the bond price changes in 1/32.
Dealer Trading
Sources of Dealers Profit
The bid ask spread- varies depending on Liquidity, volatility and remaining maturity.
Favorable market movement- such as Appreciation in securities that the dealer is long, Depreciation in securities that the dealer has short position.
Carry- difference between the interests earned on the securities held in inventory and the financing costs.
Dealer System-
Single dealer- customers trade with a specific dealer Multidealer- consolidates bids and offers from multiple dealers
CrossMatching System-
Provide a real time of periodic cross matching session where users can execute transactions electronically with multiple counterparties on an anonymous basis.
International transactions are settled through the Clearing House Interbank Payment Systems (CHIPS)
Objectives Facilitating securities trades to encourage higher level of trading activities. Reducing risks resulting from handling shares during trading process. Applying the Delivery versus Payment principle (DVP), which is the norm in international capital markets. Executing the clearing and settlement transaction at an exact specified period. Features Customizable time frames to settle different types of securities to meet the market rules. Supporting the DVP (delivery versus payment) mechanism. Integration with the Settlement Guarantee Fund (SGF) system. Security measures to prove securities ownership authenticity.
Agency Securities
Agency securities are debt obligations issued by federal or federally sponsored agencies.
FRFIs: branches of the federal govt. that offer subsidized financing to selected sectors. Through securities issuance Federal Financing Bank raises all funds for FRFIs. GSA: privately owned but perceived to carry an implicit govt. guarantee. They issue their own securities.
1994
1995 1996 1997
40.3
38.3 41.7 46.4
165.1
159.9 185.0 220.5
205.4
198.3 226.7 266.9
1341.7
1293.5 1296.0 1318.7
1998
1999 2000 2001
34.7
36.6 41.0 56.2
286.2
227.4 200.2 286.6
320.9
264.0 241.2 342.8
1402.9
1457.2 1480.9 1603.7
2002
2003 2004
72.4
69.8 58.2
357.7
382.8 360.3
430.1
452.6 418.5
1763.1
1892.2 2018.6
Municipal Securities
Revenue bonds
Underwriting process
Issuance
Competitive bidding
Negotiated deal
Underwriting process
Competitive bidding
The
municipality will sell its bonds at a public auction and after the bids are solicited from various underwriters ,the bonds are sold to the highest bidder , that is , the bid that produces the lowest financing costs for the municipality
Underwriting process
Negotiated deal
The municipality selects underwriter or underwriting syndicate and if an underwriter has successfully handled prior bond issues for the issuer ,the municipality may simply use the underwriter again without soliciting other proposals ,otherwise the municipal issuer will request proposals from several underwriters and make its selection after evaluating all the proposals
Required Disclosure
Prepare official statements meeting the content requirements of the rule File certain financial information and operating data with national and state repositories each year
General Exemption
A private placement exemption for securities sold to no more than 35 sophisticated investors who purchase for investments , not distribution An exemption for certain securities that the holder has a right to tender at a price of at least par as frequently as every nine months An exemption for securities with maturity of nine months or less
Corporate Bond
MTN
Commerci al paper
Secured Bond
Unsecure d Bond
Directly Placed
Dealer Placed
Commercial Paper
Short-term unsecured promissory note.
Provide short-term funds for seasonal, working capital needs and bridge financing. Alternative to short term bank loans.
Cheaper than tapping a line of credit from a bank.
Commercial Paper
Maturities range from 1 day to 270 days.
Exempt from registration as long as the maturity does not exceed 270 days.
Most common maturity range is 30 days or less. CP holders are paid off at maturity through rolling over. Issuers: financial companies and nonfinancial companies. credit-supported & asset-backed commercial paper
Corporate Bond
A promise by the company to pay periodic coupons and repay the principal at maturity. Underwriting and distribution handle by securities firms. Bond may or may not be asset backed.
Mortgage Bond: backed by real estate. Collateral Trust Bonds: backed by securities. Debentures: backed by no specific assets. Subordinate debentures: get paid third in line after secured debt
and debentures.
Callable Bond: issuer has the right to pay off the debt before maturity. Puttable Bond: investor has the right to put back the bond to the issuer at par.
Junk Bond: Bonds having credit rating of BB or lower. Zero Coupon Bond: offers no coupon.
Underwriting Spreads
Difference between the price paid by the buyers and proceeds to the issuers Gross spread is generally less than 1% in high quality issue and 3% in junk bonds. Gross spread is distributed among different intermediaries. Loss is allocated among the underwriting syndicate members at pre-agreed rate.
Risk Management
Unanticipated Price Surge:
Quick sale of shares.
Short Position: financial loss or green shoe position
Private Placement
Differs from registered public deals in covenants and price. Regular SEC registration process is not followed. Lower Legal and registration expenses.