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Selected Interest Rates, Federal Reserve
Wall Street Journal Current & Historical Rates
Bloomberg Current Bond Rates
ECB Current & Historical Rates
Euribor Current & Historical Rates
Historic LIBOR Rates, British Banker's Association
FNMA Benchmark Bills Auction Results
Dow Jones Fixed Income Indexes
CME Group One Month LIBOR Futures Index on Globex
Daily Treasury Long-Term Rates, U.S. Treasury
Daily Treasury Yield Curve Rates, U.S. Treasury
Bank Rate, Monetary Policy Committee, Bank of England
HIBOR / Hong Kong Interbank Offered Rate, Hong Kong Association of Banks
Please also see the separate page on U.S. and International Securities Market Supervision and Regulation
The debt capital market is divided into short-term financial instruments (Money Market) and long-term financial instruments (Capital Market bonds). Please see the Money Market Section for an explanation of short-term debt instruments (CDs, Banker's Acceptances, etc.).
The purchasers of debt include foreign nations, bank, financial institution and non-bank financial institution trading desks, corporate treasury operations, individual investors, and pension and investment funds.
Debt capital is money loaned to an entity (government, organization or corporation) by investors. A Bond is a security that is issued by the entity that borrows the capital and represents the formal written obligation from the issuer to repay the borrowed amount of the issued bond. On the accounting statements of the entity that the issued bond it is termed as debt or liability. This is a key difference between a bond and stock. Stock represents an ownership interest in the entity / company. If you accumulate enough stock, you will own the company. Whereas, a bond is a loan. You don't own any part of the company by lending it capital although you may be given a claim on specific assets as collateral for the loan.
A government, agency, municipality or corporation must decide whether borrowing money is an appropriate addition to its capital structure, how much of an amount is an appropriate issue, whether the interest cost is the lowest possible, what maturity, redmption features and covenants should be offered
The terms Debt, Bond, Debt Security, Debenture and Loan all tend to be substituted for one another and what they do have in common is that they all mean that an entity has borrowed funds (principal) for a specific period and has an obligation that they must eventually pay the funds back to the lender. What distinguishes a Debenture is that is is usually an unsecured loan (not collateralized by specific pledged assets) and is offered based on the financial strength of the issuer and its ability to repay.
As per the Investment Company Act of 1940, a "Security means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing."
One of the keys to an issue being brought efficiently to the market at favorable pricing is whether the entity has a public rating from of the Credit Rating Agencies.
Every public bond issue receives a CUSIP (Committee on Uniform Security Identification Procedures) indentification number, which follows the specific bond through the lifetime of its existence and is always referred to with regard to transactions related to the bond (sale, call redemption, maturity, etc.).
Bonds use to be sold to investors in the form of a Bearer Bond, also known as coupon bonds. With bearer bonds, the purchaser's name was not recorded nor did it appear on the purchased bond or the coupon. The purchaser or their trustee submit the coupon(s) twice a year and the authorized bank pays the interest. For instance, a twenty year $1,000 bond paying 8% interest would have 40 coupons for $40 each. Bearer bonds can be used like cash and they are highly negotiable. There are still many in circulation however, due to loss or stolen bonds being difficult to trace the Tax Reform Act of 1982 ended the issuance of new bearer bonds.
Today, bonds are sold either in a fully registered form (Registered Bond) or book-entry. A registered bond comes with the purchaser's name already on them. Twice a year, the purchaser automatically receives a check for the interest. At maturity, the registered owner receives a check for the principal amount. A partially registered bond is a cross between a registered bond and a coupon bond. The bond comes registered to the purchaser however, it has coupons attached which must be sent in for payment. When a registered bond is sold prior to maturity, the registered owner has to endorse the bond over to the new owner. When a bond is sold in book-entry form, the purchasers name is submitted to an stored in the database server of the clearing house. The sales confirmation from the broker / dealer is the only written record of the the transaction, no bond certificate is actually issued. The advantage of this format is the cost savings for not having to design, print and distribute certificates or having to pay for custody / security services. The advantage to the investor is that there is no certificate to misplace or be stolen, it is very easy to transfer ownership if the bond is sold, and the bond holder receives automatic interest payment by electronic funds transfer and automatic notification of calls.
Bonds typically have a fixed maturity of when the full or partial repayment of the bond is due. The maturity can be from overnight to in excess of 30 years, depending on the type and purpose of the bond. There may also be a schedule of partial repayment of a portion of the principal prior to the final maturity date. The bond also usually has an indicated interest rate, which is the cost to the issuer for borrowing the funds and the fee to the bond holder for lending the funds. Interest rates in the marketplace are always fluctuating and will move in terms of basis points and percentage points. A basis point is one hundredth of a percent (0.01%). A percentage point is one hundred basis points or one full percent (1.00%).
The bond is issued at Face Value, which is the Principal amount of the bond itself. Depending on the Issuer and the characteristics of the issue there could be a single bond or a series of related (and sequential) bonds, each in the face value principal amount of $1,000 to $1,000,000 (or some round amount in between), with as many bonds issued as is necessary to add up to the total amount of funds required by the borrower.
The amount of the interest rate reflects the perceived credit worthiness of the Issuer and the prevailing interest rate environment at the given point of time of the date of the new bond issue. The interest rate charge is computed as a percentage of the face value of the bond. The Frequency of interest payments (when a payment is made by the bond issuer to the bond holder) can be structured to be either monthly, quarterly, semiannually or annually.
Interest payments on a fixed rate bond do not fluctuate over the lifetime of the bond. Floating rate interest payments fluctuate as interest rate market conditions change over the lifetime of the bond. The decision by the Issuer to structure the bond as a fixed rate or floating rate issue reflects the matching of revenue sources to repay the bond(s) and / or the perception by the Issuer of what the interest rate market conditions may be in the future.
An example of computing accrued interest would be a USD $10 million bond, paying 4.75%, 360 day annual calendar assumption and 19 days elapsed; Accrued interest: $10,000,000 multiplied by 4.75% = $475,000, divided by 360 = $1,319.44, multiplied by 19 = $25,069.44 accured interest.
In Zero Coupon bonds the interest "coupon" (rate) is stripped from the note/bond and no periodic interest payments are made. Rather, a Zero Coupon Bond is sold at a discount to its face value. By paying the investor the face value at maturity there is an implied interest rate that makes the bond grow to its face value from the discount value. All "interest" is paid upon maturity although accrued interest is subject to taxes annually. The value of this bond can be volatile if the inflation rate or interest rates increase and the implied lock-in rate is below inflation / present interest rate.
The Indenture Agreement is the terms of the legal agreement between the Borrower and the one loaning them the money. The Indenture, which is printed on the bond certificate, contains the following information: The duties and obligations of the trustee (usually a bank or trust company hired by the corporation), all the rights of the lender (the bondholder), how and when the principal will be repaid, the rate of interest, the description of any property to be pledged as collateral if applicable, steps the bondholder can take in the event of default, and callable features.
The Trust Indenture Act of 1939 stipulates that bonds, debentures, and notes that are registered under the Securities Act of 1933 may not be offered for sale to the public unless the Trust Indenture (again, the formal agreement between the issuer of bonds and the bondholder as indicated previously) conforms to the standards specified by this Act.
There is a very active secondary market for bonds, especially government (federal and municipal), government agency, GSE, supranational, highly rated corporate debt securities and high yield bonds. High grade corporate debt use to be listed on the NYSE Automated Bond Trading System, however the actual volume of listings has declined substantially in the past decade. There has recently been the development of an electronic secondary market exchange for debt securities, however most bebt securities still tend to marketed and sold through a over-the-counter network of investment banks, broker / dealers and banks that communicate electronically and telephonically.
The yield to maturity of a bond always moves in the opposite direction of its price. For instance, if a bond is paying 6% per annum, and interest rates on similar debt decline to 5%, then the bond paying 6% is more desirable to own as it is paying a higher interest rate compared to similar bonds. However, many investors want to hold the 6% bond, thus the market price to purchase the bond increases due to competitive demand. A potential owner will have to pay a Premium to own the bond. This Premium means that the potential owner is paying more than par or more than 100% of the face value of the bond. However, the potential owner will still only receive the 6%, thus the yield to maturity has declined as now the 6% received per annum is measured on a higher purchased value (perhaps 101.5% over face value) as opposed to the original face value of the bond. Conversely, if one pays a Discounted price for the bond, say 99.5% of the original face value of the bond, then the yield has increased to the bondholder as the per annum payment is measured against a new value less than the issued face value. Yields move inversely to prices.
The Yield Curve is the difference between short and long-term rates.
In the United States, changes in the value of a bond are quoted in fractions.
Convert Fractions to Decimals
An issuer does not bring a debt offering to the market on their own. Rather, the bond offering is usually underwritten by a syndicate of investment banks and financial institutions that have departments and personnel with the experience of presenting and selling a debt issue to potential investors. The offering will include a legal opinion setting out the tax-exempt status of the debt offering to investors or a certain class of investors.
All governments need to finance their operations, which consists of departmental and agency programs and payroll for all levels of employees. If tax and revenue is insufficient to cover the costs of operating a government then the government must issue bonds (debt) to raise funds. This debt is purchased and held by foreign governments, institutional investors, financial institutions, corporate treasury operations, investment funds and individual investors.
U.S. Treasury issues are considered the world's risk-free investment, hence the interest rate is closely monitored and functions as an index rate (what other lower quality debt interest rates are based on, for instance some margin measured in basis points is added to the U.S. Treasury rate to compensate for the higher risk). Treasuries are sold by competitive auction in which the response and bidding by investors determines the pricing of the bond offer. The U.S. Treasury also sells individual Savings Bonds. Interest on U.S. Treasuries are taxed at the Federal level for investors required to file with the IRS in the United Staes but not at the state or local level.
Treasury Bill (T-Bill) short-term of one week to 12 months (maturity may not exceed one year); issued and purchased by investors at a discount and pay / redeemed at par (face value) at maturity.
Treasury Note (T-Note) is a medium-term obligation of one to ten years (maturity may not exceed ten years); Purchaser locks in a fixed interest rate and receives interest payments on a semi-annual basis (every six months) until maturity; Marketed / sold by auction at a discount, at par, or at a premium according to the results of the auction and are redeemed at par at maturity.
Treasury Bond (T-Bond) is a long-term obligation of ten to thirty years, and pay interest on a semi-annual basis. The thirty year bond is also known as the long bond and makes interest payments on a semi-annual basis (every six months until maturity. As of Fall 2001, the United States has not been issuing 30-year Treasury bonds.
TIPS: Treasury Inflation Protected Securities (Notes and Bonds), inflation indexed bonds that adjust the underlying principal twice a year in response to the CPI-U (Consumer Price Index - Urban Consumers) report and make semi-annual payments. Not only is the accrued interest taxable but the increase in principal is also taxable as it is considered an increase in income (known as a "phantom tax" as it is not payable until the bond is sold or redeemed at maturity). The TIPS bond must be compared to the similar term, fixed-rate Treasury bond to determine if its a better investment in an inflation environment. TIPS were first first introduced in May 1996, had its structure finalized in September 1996 (patterned after the Canadian Real Return Bonds), and the first auction was January 1997 based on the single price Dutch-style auction procedure. There is also a repo market in TIPS.
STRIPS (Separate Trading of Registered Interest and Principal of Securities), which are Zero-coupon securities backed by the U.S. Government that have been separated into interest and principal components.
The Series I U.S. Savings Bond (I Bonds) is an inflation-adjusted savings bond. It is an accrual-types security such that interest is added to the bond monthly and only paid when the bond is cashed. The cost of the bond is face value and the interest rate has 2 components: a fixed rate (set every May and November bt the U.S. Treasury Department) and an iflation-linked index (CPI-U) that is adjusted every six months. Earnings from I Bonds are exempt from state and local taxes and is deferred of federal taxes until the bond is redeemed. These bonds are denominated in (United States dollars) $50, $75, $100, $200, $500, $1,000, $5,000, $10,000. Any investor is limited to total investments in I Bonds of a maximum $30,000 per annum. I Bonds are redeemable after 12 months from date of purchase.
With the introduction of the Euro, all participating European nations had to redominate their benchmark national currency bonds into euros (under the terms of the Maastricht Treaty wholesale European markets had 3 years from 1999 to switch their instruments to euros).
Belgian government securities
Linear Obligations
State Loans
Treasury Certificates
Treasury Notes
Danish government securities (Kingdom of Denmark)
Statsobligationer (Government Bonds)
Statsgaeldsbeviser (Treasury Notes)
Skatkammerbeviser (Treasury Bills)
French government securities
BTAF / Bons du Trésor à Taux Fixe (French Treasury Discount Notes); issued in auction at a discount to par, with a maturity at issuance of 13, 26 or 52 weeks.
BTAN / Bons du Trésor à Intéret Annuel Normalisé (French Treasury Notes); maturity of 2 to 5 years.
OAT / Obligations Assimilables du Trésor (Government Bonds); fixed and floating rate (OATi), maturity of 4 to 30 years.
STRIPS (stripped tranches from OATs)
Billet de Trésorerie (Commercial Paper)
German Federal securities (Federal Republic of Germany)
Bobl / Bundesobligationen (Five-year special Federal bonds)
BSA / Bundesschatzanweisungen (Federal Treasury Notes)
Bubills / Unverzinsliche Schatz anweisungen des Bundes (Treasury Discount Paper), 6 month maturity
Bunds / Bundesanleihen (Federal Bonds), 10 to 30 year maturity
Schätze / Bundesschatzanweisungen (Federal Treasury notes), 2 year maturity
U-Schätze / Unverzinsliche Schatzanweisungen (Treasury Bills / Discount Paper)
Bonds of the Treuhand Anstalt
Fundierungsschuldverschreibungen (Funding bonds)
The auction of Federal Government issues debt for the funding to the Federal budget and its special funds is managed by the German Finance Agency (Bundesrepublik Deutschland Finanzagentur GmbH) and is carried out by the Bundesbank.
There is a repo market in all German government bonds, Treuhand bonds and Pfandbriefe.
Italian government securities
BOT / Botbuoni Ordinari del Tesoro (zero coupon debt securities); maturities up to 365 days.
CTZ / Certificati del Tesoro Zero Coupon (Zero coupon debt securities); maturities between 18 and 24 months.
BTP / Buoni del Tesoro Poliennali (Treasury Bonds); maturity 3, 5, 10, 15 and 30 years.
CCT / Certificati di Credito del Tesoro a Cedola Variable (Floating Rate Treasury Certificates); floating rate maturity of 7 years.
Spanish government securities
Letras del Tesoro (Treasury Bills); maturities of 3, 6 and 12 months.
Canadian government securities (Federal Republic of Canada)
Treasury Bills (T-Bills), non-interest bearing currency notes, issued in denominations ranging from CAD$1,000 to CAD$1,000,000; new issues are sold by public tender at a discount, with terms to maturity of 3, 6 or 12 months, and are auctioned on a biweekly basis.
Bonds (Canada Bonds / Obligation du Canada) fixed-coupon, non-callable, negotiable debt obligations with fixed maturity of 2, 5, 10, 30 years, marketed by competitive (auction) and non-competitive (allotment) bids from Primary Distributors., available in denominations ranging from CAD$1,000 to CAD$1,000,000.
Real Return Bonds, denominated in CAD; interest payments are adjusted in relation to the Canadian consumer price index (CPI), as published monthly by Statistics Canada.
Canada Savings Bonds (CSB) issued to Canadian residents only. Canada Notes (minimum maturity nine months) are denominated in USD (United States dollars). Canada also issues a Euro Medium-Term Note (EMTN) outside Canada and outside the United States.
Russian government securities
GKO: Gosudarstvenii Kratkasrochnii Obligatsii: Russian Treasury securities.
United Kingdom
Conventional Gilts: "Gilt-edged stocks" or "gilts" are tradeable securities issued and guaranteed by the UK government. They are identified by coupon, maturity, and a name, and are referred to as stocks. The initial issue size of a conventional gilt is usually £2 billion to £3 billion, but is increased with repeated reopenings. Almost all conventional issuance is by auction, although rarely there are small taps. Gilts are generally held in registered form in the domestic settlements system, the Central Gilt Office (CGO), although they can also be held via Euroclear. The National Stock Savings Register is available for small investors, and some gilts can be held in bearer form, but this is rare. Gilts trade on the London Stock Exchange.
Strippable gilts are conventional semiannual bullet bonds, paying coupons on the 7th of June and December. Since 1994 all new conventional gilts have been strippable, and this is expected to continue. Note that gilt strips will be direct obligations of the government, and thus have the same credit as coupon-paying gilts.
Nonstrippable conventional gilts are bullet bonds with a variety of maturity dates. Because of the mixed maturity dates, the coupons do not align; accordingly, none of these gilts will be made strippable.
Double-dated Gilts have 2 maturity dates, between 3 or 5 years (these securities are no longer issued).
Undated or Perpetual Gilts are Conventional Gilts with no maturity.
Index-linked Gilts adjust based on the index of the Retail Pricing Index published by the Office of National Statistics.
Rump Stock are Gilts with a nominal value.
Gilts have an open repo market (commenced in 1996), which uses the PSA/ISMA documentation, with a separate annex applicable to gilts. Generic repo documentation will not suffice, the annex is necessary.
Treasury Bills
The World Bank, African Development Bank (Located in Abidjan, Côte d'Ivoire, members are 53 independent African states and 24 non-African states; capital stock is owned by its member countries), Asian Development Bank, Inter-American Development Bank, European Investment Bank, Caribbean Development Bank, European Bank for Reconstruction and Development all issue debt in the global markets to fund projects.
Notes and bonds issued by a supranational organization do not represent the obligation of any government. The notes are issued at a discount or may bear fixed or floating rate interest or a coupon calculated by reference to an index or formula. In the United states, supranational debt are somtetimes referred to as exempted securities within the meaning of Section 3(a)(2) of the Securities Act and Section 3(a)(12) of the United States Securities Exchange Act of 1934.
Government agencies are actual divisions of the U.S. Federal government and the debt issued by these entities are backed by the full faith of the goverment (issued under the authority of an Act of Congress and are exempt from registration with the Securities and Exchange Commission). The most active issuer is the Government National Mortgage Association (GNMA / "Ginnie Mae"), Tennessee Valley Authority (TVA) and the U.S. Agency for International Development (U.S. AID).
Government Sponsored Enterprise (GSE) sometimes are also defined as federal agencies. However, GSEs are organizations that were sponsored by the U.S. Federal government to provide credit and financing to specific borrowers within the nation as a part of social policy. These entities are private corporations and not a division of the U.S. Federal government nor does the government guarantee their debt securities. Federal Home Loan Bank Board (FHLB), Federal National Mortgage Association (FNMA / "Fannie Mae"), Federal Home Loan Mortgage Corporation (FHLMC / "Freddie Mac"), Federal Farm Credit Banks, Student Loan Marketing Association (SLMA / "Sallie Mae"), Federal Farm Credit Bank (FFCB), Federal Agricultural Mortgage Corporation (FAMC) or Farmer Mac, Resolution Funding Corporation (REFCORPS; no longer issued, but are available on the secondary market in maturities of 1- to 30-years), Financing Corporation (FICOs; no longer issued, but are available on the secondary market in maturities of 1- to 20-years).
Both FNMA and FHLMC assemble and package mortgage-backed securities, however they both issue debt under their own names (unsecured obligations) to fund their purchases of mortgage loans prior to securitization or for purchasing mortgage loans to hold in their own portfolio. For instance, FNMA (one of the largest debt issuers in the world) issues Benchmark securities: Benchmark Bills (1-month, 3-month and 1-year maturities) issued through a Dutch Auction mechanism, Benchmark Notes and Callable Benchmark Notes issued through a traditional underwriting syndicate.
FNMA debt receives a favorable treatment in the marketplace as although it is not a subdivision of a U.S. Federal government agency and the U.S. Federal government does not guarantee its debt, there is a perception in the marketplace that there is an implicit commitment that the U.S. Federal government would support the FNMA (and FHLMC) sufficiently that they would be in a position to honor their obligations. Thus, FNMA has a credit rating of AAA / A1+ (Standard & Poor's), Aaa / P-1 (Moody's) and AAA / F1+ (Fitch), and pricing on its debt is somewhere between U.S. Treasuries and AAA corporate debt. In addition, depository financial institutions and commercial banks subject to risk-weighted assets capital regulations have a lower capital reserve requirement for FNMA and FHLMC debt (similar to U.S. Government debt of 0%) than they would have for corporate debt (50% / 100%).
The FHLB Chicago is in the process of developing a program to securitize the mortgages it purchases from its member banks and then resell the securities to its members. It is anticipated that the next step would be to begin to offer MBS to the public.
MBS securities are purchased by banks, pension funds, endowment funds and mutual funds. During 2002 and 2003, a record amount of MBS were created and purchased. The surge in MBS volume reflected the record amount of new home purchases and refinances spurred by the record low interest rate environment prevalent during those 2 years. However, investors who hold these securities are subject to interest rate shock. In a continued low rate environment these securities may have a 4 year maturity. However, if rates rise and the individual homeowners whose mortgages make up these securities remain with their low rate mortgages then the MBS maturity increases substantially out to seven years or longer. These longer term assets are more subject to interest rate moves and if rates move higher then their value moves inversely.
The Federal Farm Credit Banks (“FFCB”) are a government sponsored enterprise (GSE, created 1916) and is a nationwide network of lending institutions and affiliated services and other entities. Through its non-deposit taking Banks and related associations, the System lends money and provides related credit and other services to farmers, ranchers, producers and harvesters of aquatic products, rural homeowners, certain farm-related businesses, agricultural and aquatic cooperatives (or to other entities for the benefit of such cooperatives), rural utilities, and to certain foreign or domestic entities in connection with international agricultural credit transactions. The Banks and related associations are not commonly owned or controlled. They are cooperatively owned, directly or indirectly, by their respective borrowers. System institutions are federally chartered under the Act and are subject to supervision, examination and regulation by an independent Federal agency, the Farm Credit Administration (FCA).
The Farm Credit System is composed of four regional Farm Credit Banks (FCB), one regional Agricultural Credit Bank (ACB) and numerous associations (approximately 99 related Production Credit Associations / PCAs, Federal Land Credit Associations / FCLAs and Agricultural Credit Associations /ACAs. The PCAs, FLCAs, and ACAs are collectively referred to as Associations) across the nation. The System Banks and Associations are cooperatively owned, directly or indirectly, by their borrowers, which are the smaller, local banks that lend directly to the agricultural sector in all 50 states of the United states and in Puerto Rico. These entities have specific lending authorities within their chartered territories.
As none of the banks within the system are deposit taking institutions, funds are raised through the issuance of Farm Credit Debt Securities in the U.S. domestic and global capital markets by the Federal Farm Credit Banks Funding Corporation (FFCBFC).
The securities are Triple-A rated by both Moody's and standard & Poor's and are sold to a client base that includes banks, state and local governments, pension funds, insurance companies, investment managers, credit unions, corporations, central banks and individuals.
The Farm Credit Debt Securities are the joint and several obligations of the System Banks.
Farmer Mac provides a secondary market for agricultural real estate and rural housing mortgages. Farmer Mac is excluded from the joint and several guaranty of the other institutions debt and they do guarantee Farmer Mac’s debt.
Farmer Mac purchases agricultural mortgage loans from mortgage lenders such as mortgage companies, savings institutions, credit unions and commercial banks, thereby replenishing those institutions' supply of mortgage funds. Farmer Mac either packages these loans into Agricultural Mortgage-Backed Securities (AMBS), which it guarantees for full and timely payment of principal and interest, or purchases these loans for cash and retains the mortgages in its portfolio. Farmer Mac obtains the funds to finance its mortgage purchases and other business activities by selling debt securities in the capital markets. Farmer Mac obtains most of its funding through two types of funding vehicles: discount notes and medium-term notes.
Farmer Mac is regulated, examined, and supervised by the Farm Credit Administration through its Office of Secondary Market Oversight (OSMO).
Municipal bonds are issued by states, provinces, counties and cities (and affiliated agencies) for funding the construction of public facilities such as schools (all grades), courthouses, housing (single-family and multi-family), sports facilities, hospital and health care, adult assisted living and libraries, or to finance infrastructure improvements, such as bridges, airports, marine facilities, pollution control, roads, railways, tunnels, telephone utilities, electric utilities, gas utilities and water and sewer systems. Repayment can come from general obligation, toll revenue, parking fee revenue, sales tax revenue, special assessment, special tax or sports facility revenue. The key attraction for investors is that the interest income earned from a municipal bond issue may be exempt from some combination of Federal, State or local taxation, which usually requires that the investor reside within the territorial jurisdiction of the issuer to obtain the full tax benefit. Not all municipal bond issues are exempt from taxation. Secondly, the exemption is on the interest income. If the bond is sold prior to maturity at a price above par, the sale may be separately taxable as a long-term capital gain (15% marginal tax).
A key measurement of whether to invest in a municipal bond that is exempt from taxation at the federal level is to determine what the tax rate is and then compare it with a taxable issue that is also available in the market:
| 4.5% Tax-exempt Bond | 6.0% Taxable Investment | ||
| Investment | $ 50,000 | $ 50,000 | |
| Interest Income | $ 2,250 | $ 3,000 | |
| Federal income tax in the 36% marginal tax bracket | 0 | $ 1,080 | |
| Net return | $ 2,250 | $ 1,920 | |
| Yield on investment after taxes | 4.5% | 3.84% |
Taxable Equivalent Yield: The calculation to determine the taxable equivalent yield (the interest rate that a taxable bond would have to pay to be equal with a tax-tree bond given the investor's marginal tax bracket) is equal to the tax free yield divided by the sum of 100 minus the current tax bracket. For example the taxable equivalent yield of a 4.50% tax free bond for an investor in the 36% marginal tax bracket would be: 4.5/(100-36) = 0.07031313, or 7.03%.
| 4.5% Tax-exempt Bond | 7.03% Taxable Investment | ||
| Investment | $ 50,000 | $ 50,000 | |
| Interest Income | $ 2,250 | $ 3,515 | |
| Federal income tax in the 36% marginal tax bracket | 0 | $ 1,265 | |
| Net return | $ 2,250 | $ 2,250 | |
| Yield on investment after taxes | 4.5% | 4.5% |
Tax Exempt / Taxable Yield Equivalents:
| Tax Bracket | 10% | 15% | 25% | 28% | 33% | 35% | 36% |
| Tax Exempt Yields (%) | Taxable Yield Equivalents (%) | ||||||
| 1.0% | 1.11% | 1.18% | 1.33% | 1.39% | 1.49% | 1.54% | 1.56% |
| 1.5 | 1.67 | 1.76 | 2.00 | 2.08 | 2.24 | 2.31 | 2.34 |
| 2.0 | 2.22 | 2.35 | 2.67 | 2.78 | 2.99 | 3.08 | 3.13 |
| 2.5 | 2.78 | 2.94 | 3.33 | 3.47 | 3.73 | 3.85 | 3.91 |
| 3.0 | 3.33 | 3.53 | 4.00 | 4.17 | 4.48 | 4.62 | 4.69 |
| 3.5 | 3.89 | 4.12 | 4.67 | 4.86 | 5.22 | 5.38 | 5.47 |
| 4.0 | 4.44 | 4.71 | 5.33 | 5.56 | 5.97 | 6.15 | 6.25 |
| 4.5 | 5.00 | 5.29 | 6.00 | 6.25 | 6.72 | 6.92 | 7.03 |
| 5.0 | 5.56 | 5.88 | 6.67 | 6.94 | 7.46 | 7.69 | 7.81 |
| 5.5 | 6.11 | 6.47 | 7.33 | 7.64 | 8.21 | 8.46 | 8.59 |
| 6.0 | 6.67 | 7.06 | 8.00 | 8.33 | 8.96 | 9.23 | 9.38 |
| 6.5 | 7.22 | 7.65 | 8.67 | 9.03 | 9.70 | 10.00 | 10.16 |
| 7.0 | 7.78 | 8.24 | 9.33 | 9.72 | 10.45 | 10.77 | 10.94 |
| 7.5 | 8.33 | 8.82 | 10.00 | 10.41 | 11.19 | 11.54 | 11.72 |
Monoline municipal bond insurers and reinsurers (Financial Guaranty Insurance)
Types of Municipal Bonds:
General Obligation Bonds are voter approved bonds that are backed by the full faith, credit and unlimited taxing power of the municipal issuer, and are primarily used to fund operations (not project specific).
Industrial Development Bonds are issued usually to renovate and rehabilitate a specific geographic location and/or infrastructure, and provide tax benefits to attract businesses to locate and operate within that specifc area.
Revenue Bond (Limited Obligation Bond) interest and principal payments are secured by the issuer's pledge of net or gross income from a specific facility (hospital, toll road) constructed with the proceeds of the bond issue.
Tax/revenue/bond anticipation notes: TANs/RANs/BANs; backed by the full faith and credit of the issuer; short-term financing; sold in anticipation of tax receipts, federal program disbursal or upcoming bond issuance. TANs are usually one year or less in maturity and when these notes have acceptable credit ratings (or are insured) they can be discounted in the secondary market for such instruments and function as money market instruments.
Municipal Bond Taxation:
Municipal bond issues are taxable at the federal level when the proceeds from the issue are utilized in a project or activity that does not benefit a wide majority of the public. The construction of a local sports team arena is one of the most well-known examples. In this case, the yields on taxable municipal issues are closer to corporate and project financing bonds with similar credit worthiness. In addition, the interest income from the municipal bonds issued by one state jurisdiction is usually taxable within the jurisdiction of another state (if the bondholder does not reside within the jurisdiction of the state that issued the bond). Only interest income from securities issued by U.S. territories and possessions of Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa and the Northern Mariana Islands is exempt from federal, state and local income taxes in all 50 states.
German municipal bonds are known as Kommunalschuldverschreibungen.
Pfandbriefe can be issued either by private mortgage banks (Hypothekenpfandbriefe) or by public law entities (Öffentlicher Pfandbriefe)
Hypothekenpfandbriefe are long-term bonds that are used to finance building loans. Öffentlicher Pfandbriefe are public sector / municipal loans. Both Hypothekenpfandbriefe and Öffentlicher Pfandbriefe are collateralized by a pool of loans referred to as the "cover pool".
In Germany, Hypothekenpfandbriefe and Öffentlicher Pfandbriefe are packaged and offered to investors through a bank. The mortgage or public sector loans offered as collateral to the issues remain on the asset side of the balance sheet of the bank, however a pledge and prior claim to the assets are recorded: the public sector loans are transferred into the Deckungsregister while the mortgage loans are transferred in the Hypothekenregister.
Pfandbriefe are considered fairly secure not only due to their collateralized nature but also due to stringent legal provisions that govern their issuance and their collateralization with real estate or by municipal guarantees (“Anstaltslast” or institutional liability and “Gewährträgerhaftung” or Guarantor’s liability). A trustee also ensures that Hypothekenpfandbriefe are always backed by mortgages of the same amount that carry at least the same interest rate. Usually Pfandbriefe have a long maturity, in some cases over 25 years. The holder of a Pfandbrief may not redeem it before the end of the agreed upon term. The borrower must begin repaying the principal at the latest when one-third of the maturity has elapsed. These bonds are primarily issued in Germany and denominated in Euro.
Jumbo-Pfandbriefe are similar in nature to Pfandbriefe. A Jumbo-Pfandbriefe must fulfill certain criteria including, for example, a minimum original issuance volume of EUR 500 million, with interest paid annually.
Corporations borrow money by either issuing bonds directly to investors or through broker / dealers, and are also active borrowers from banks (bilateral and Syndicated Loan market. Corporations with every level of credit rating issue debt and the interest rate paid on that debt is dependent upon public perception and credit rating agency assigned ratings for a particular issue or the review of the condition of the company. Some investors will not purchase the debt of corporations that have a public rating below a certain level. Debt can also be placed privately with a select group of investors. Any investor that holds the debt of a company is considered a "creditor" of the company, and it is not unusual for a large, well-known public company to have two levels of Senior and Subordinated debt / creditors.
High Yield/Junk Bonds are securities issued by corporations with credit ratings below investment grade (Ba Moody's / BB S&P). These bonds have a higher coupon and yield compared to higher rated bonds of similar maturity.
Corporations can issue mortgage bonds that specifically cover the construction or acquisition of office or manufacturing facilities.
Commercial banks hold a substantial amount of corporate debt in the form of bank loans. These institutions have ccapital reserve regulations that requires that they have sufficient Risk Capital set aside as a percentage of their total exposure to publicly rated corporate debt. These is some controversy of the reserve requirement as it is the same ratio regrdless as to whether the corporate credit is rated AA or BB.
Similar to U.S. Treasury TIPS, some corporations have begun to issue inflation-indexed (CPI-U) bonds that adjusts the coupon on a semi-annual basis (different from the TIPS, which adjust the principal).
FDIC Temporary Liquidity Guarantee Program
In response to the problems that developed in the financial markets during 2008, the FDIC Temporary Liquidity Guarantee Program was commenced (October 14, 2008) in order to promote liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies. Debt that is issued by the end of June 2009 will be fully guaranteed by the FDIC to June 2012. This federal guarantee resulted in November 2008 of Goldman Sachs issuing $5.0 billion in 3-year bonds, Morgan Stanley issuing $5.75 billion, and J.P. Morgan issuing $6.5 billion. The market is expected to grow to between $250 to $350 billion by June 30, 2009.
In the United States, a not-for-profit organization (as defined by the Internal Revenue Service Code, 26 U.S.C. 501) may enter into a debt instrument.
Emerging market debt is a generic name applied to any type of Brady bonds, global bonds, Eurobonds, local issues and loans from non-G7, non-OECD, non-EU nations, financial institutions, corporations and municipalities. These securities can be issued in the local currency, in USD in the U.S. market (the interest rate on these debt securities is usually a margin over similar maturity U.S. Treasury securities) or as Eurobonds. The rates paid investors represent the public perception of the willingness and ability of the corporations and / or the local government to service the debt. Secondly, investor interest is inverse to where U.S. and Euro interest rates are: if U.S. interest rates are falling, and global economic conditions may improve then investors looking for an increase in yield may consider emerging market debt. Usually, but not always, when U.S. interest rates start to increase money is moved back to domestic U.S. debt securities. In addition, the interest in emerging market debt is also influenced by the exchange rate of the local currency with other major currencies: an investor is looking for a possible strengthening of the local currency during the maturity period of the debt issue, which means that the overall return on the investment will increase.
Brady Bond: (named after a former U.S. Treasury Secretary Nicholas Brady and enacted under the March 1989 Brady Plan) issued by certain countries to replace defaulted / devalued bank debts of companies domiciled within the respective nation, and partially collateralized by U.S. Treasury securities. Significant political/economic risk. Brady Bonds are securities that have resulted from the exchange of commercial bank loans, sometimes defaulted loans, into new bonds. Most Brady Bonds are denominated in US dollars. There are also Bradies denominated in Euro, Canadian Dollars, Japanese Yen, British Pounds, and Swiss Francs. There is also a Brady bond repo market.
Please also see the Repo (Repurchase Agreement) Page.
Callable Bond: allows the issuer to redeem the bond prior to maturity (usually when interest rates fall and the issuer can issue new bonds at a lower rate). Usually pay a higher interest rate than non-callable issues and offer call protection for a specified period. The issuer will indicate a Call Price, the prive at which the bond will be redeemed.
Convertible Bond: usually a junior or subordinated debenture that can be exchanged for shares of equity in the issuing entity on a certain date. These bonds are also sometimes referred to as DECS (Debt Exchangable for Common Shares securities). Convertible "securities" are equity-linked securities that include convertible bonds, convertible preferred bonds, equity-linked notes and warrants. Structured convertible securities are repackaged convertible bonds that have the equity conversion option stripped out, which is sold to one investor group, and the remaining debt component is sold at a discount to another investor group. Contingent convertible bonds (CoCo bonds) are debt that are convertible to equity shares once the underlying reference share has appreciated a certain amount from the date of the issue of the bond.
Duration: is a measurement of how long it will take you to recoup your investment (as opposed to maturity) if you are concerned about the future interest rate environment. It is calculated by multiplying the present value of each bond's payment by the number of years in which the payment is offered, then dividing the sum of these by the price of the bond. [The coupon payments are given decreasing value because inflation makes a dollar today worth more than in the future. Thus, the sooner you get the money back, the more valuable it is]. Since the value of the payments decreases over time, duration is normally shorter than maturity. The longer your money is out on loan, the more at risk it is, so the higher the coupon, the faster you get your money back. Compare two bonds with identical yields to maturity of 7.59% and similar maturities: a 22-year Treasury selling at $963.20 with a coupon of 7.25% has a duration of 10.66 years, while a 21-year Treasury selling at $1,378.60 with a coupon of 11.25% has a duration of 9.4%. Thus, the second bond with the lower duration would be the better bet if rates were to rise.
Floating-Rate Note (FRN): A bond paying a variable rate of interest linked to a short-term index such as the three-month or six-month LIBOR. The rate is reset regularly to a fixed amount above or below the reference rate (the margin).
Nominal Yield: the stated interest rate paid on the bond; computed by dividing the amount of annual income by the bond's par value; the interest rate stated on the face of the bond. This is also referred to as the 'Coupon Rate'. A $1,000 corporate bond with a stated interest rate (Nominal Yield) of 10%, will pay $100 per year in interest. The interest will be paid in two $50 payments (semi-annual).
Pass Through: structure of a pool of securities in which the monthly payments of principal and interest on the individual securities in the pool are collected by the issuer and "passed through" to the investor on a regular basis (GNMA, FNMA and FHLMC).
Refunding bonds: issued to replace and outstanding issue that has been called or retired.
Senior debt or creditor position is used to describe the priority of claims. Every debt security has priority or senior claim to preferred stock (which has priority to common stock). Senior bonds would indicate that the bonds are either mortgage bonds or equipment trust certificates since these bonds are senior to any other type of bonds. Senior debt has a prior claim to assets in the event of a default to all other creditors. An entity may have more than one issuance or note/bond program, thus new / additional senior debt issues are usually ranked "pari passu" or in equal standing without preference with all present and future senior / unsubordinated indebtedness.
Bank loans tend to have senior claim ahead of senior bond holders. Senior committed bank facilities are usually collateralized by a first lien on any unencumbered current and long-term assets of the company at the time of the loan and perhaps any future assets obtained by the company during the life of the loan. This type of lending is generally provided by banks and other financial institutions. The interest rates for senior term debt may be either fixed or floating rate, typically it is a floating rate (margin over an index rate such as LIBOR).
Sinking Fund: require issuer to deposit money in an account held by a Trustee, and the money is used to partially redeem portions of the issue during the term of the security or fully redeem the bond at maturity.
Subordinated debt or creditor (bond issue or bank debt) means that the claim held by a certain class of debt holder / creditor on the assets of the issuer comes behind or after other creditor claims (subordinated to Accounts Receivalbe / Inventory secured revolving credit facilities and Senior Debt in claims on unencumbered assets and cash flow). A debenture which is subordinated comes behind every other creditor. However, no matter how subordinated the debenture, it still comes ahead of any class of equity stock. Due to its riskier position in the hierarchy of claims it commands a higher interest rate.
Euro-yens: bond issues sold in Europe, but are denominated in yen. There rates tend to be slightly lower on domestically issued yen bonds because they are bearer in form, and international investors will accept a lower yield in return for anonymity. The Euro-yen market requires Japanese investors to maintain a foregin securities trading account whereas with Samurais, buyers do not have to have an account outside Japan. Euro-yen holdings are considered part of a Japanese investment manager's foreign securities holdings and are restricted by foreign investment limits. Euro-yen has a fairly liquid secondary market compared to Samurais.
Eurobonds are bonds denominated in a currency other than issuer's domestic currency and issued to the global capital markets. Eurobonds are also denominated in USD but are issued outside the legal jurisdiction of the United States. These bonds may also be issued into several domestic markets simultaneously and outside the jurisdiction of any one country. Eurobonds are usually underwritten by an international syndicate / consortium of investment dealers for sovereign governments, corporations and supra-national organizations. In addition to credit risk, investors from other jurisdictions may also be subject to foreign exchange risk, which will effect the total return on the investment, and may also be subject to political risk. In 1995 the settlement of Eurobonds went from 7 days to 3 days after the trade date (T+3) as mandated by the International Securities Market Association (ISMA).
Euro Medium Term Notes (EMTN) are multi-currency denominated, with maturities of 3 to 10 years, and are used by agencies, corporations and financial institutions.
Samurai Bonds: are Japanese debt instruments denominated in yen that are issued by organizations domiciled outside of Japan. Japanese can purchase bonds from non-Japanese organizations but receive principal and interest in yen. Samurais generally offer higher yields than Japanese domestic debt issues. Some Samurai issues are listed on the Tokyo Stock Exchange and tend to be development banks and sovereigns. They are either backed by the full faith and credit of the issuer or collateralized by specific assets. There are also dual currency Samurais that allow the investor to have interest from the Samurai denominated in one currency and principal denominated in another. Because Samurais are issued in Japan, an investor can diversify their holdings internationally without bumping up against restrictions (because the Euro-yen market requires Japanese investors to maintain a foregin securities trading account whereas with Samurais, buyers do not have to have an account outside Japan). Samurai bonds are purchased by Japanese investors in the primary market and held to maturity thus the secondary market is fairly illiquid compared to Euro-yens.
Yankee Bonds are bonds issued into the U.S. domestic market, denominated in U.S. dollars, by a foreign issuer. In order to issue in the United states, the entity must register with the Securities and Exchange Commission (SEC), issue financial statement reconciled to GAAP and obtain a credit rating from at least 2 of the SRO public credit rating agencies.
In 1990 the Securities and Exchange Commisssion (SEC) passed Rule 144A, which allowed non-U.S. companies issue debt (or equity) in the domestic U.S. market without registering the specific issue. The securities could only be sold to qualified institutional buyers (and could only be traded in a secondary market among other qualified institutional buyers). After 2 years, these unregulated issued securities could be sold in public markets. The secondary market trading was handled by NASD PORTAL (Private Offerings, Resales and Trading through Automated Linkages). The 144A market competes closely for capital with private placements.
Current Yield: the ratio of interest to actual market price of the bond; Annual interest divided by current market value; the annual return in dollars divided by the current market price of the bond. Divide the annul return in dollars ($100 in our example above) by the amount the bond is currently trading for. Let's assume the current market price of the bond is $1,200. The current yield is $100 divided by $1,200 = 8.3% or .8333. Regardless of how much the bond changes in price, the nominal yield (interest paid as stated on the face of the bond) always remains the same. However, because bonds fluctuate in price (they trade and can be bought and sold like stocks), the return the investor receives fluctuates. The current yield is the coupon rate divided by the current market price. For instance, a $1000 par value bond with a 6.5% coupon selling at $1100 has a current yield of 5.9% (65 / 1100).
Yield to Maturity: When an investor buys a bond for a price other than $1,000 he still receives $1,000 in principal re-payment at maturity. So a person who pays $1,200 for a bond still only receives $1,000 at maturity. Conversely, a person who pays $900 for a bond, will receive $1,000 for the bond in principal re-payment at maturity. The difference between par value (the face value of the bond) and the amount the investor actually paid for the bond, is also considered yield and has to be included in yield calculations. In other words, somehow the investor needs to account for this difference to better understand what the true value of the bond is to him. There are two different calculations for Yield To Maturity. The first one is if the investor bought the bond at a discount. The second calculation is used if one bought the bond at a premium.
Yield to Maturity (If you bought the bond at a discount):
Coupon + Prorated Discount (divided by) (Face Value + Purchase Price) / 2
Where:
Coupon = Dollar amount of annual interest
Prorated Discount = Divide the discount by the number of years remaining until maturity to come up
with a dollar amount.Face Value = With corporate bonds it's usually $1,000
Purchase Price = Amount you paid for the bond
Yield To Maturity (If you bought the bond at a premium):
Coupon - Prorated Premium (divided by) [Face Value + Purchase Price] / 2
The difference here is that the Prorated Premium is subtracted from the Coupon.
Generally, Yield To Maturity is what bond traders look at when evaluating a bond. It is the only yield which takes into account principal, coupon rate, and the time to maturity on a bonds actual yield.
The Leveraged Carry Trade is the investment strategy of purchasing bonds by borrowing at very low short-term rates and investing in higher yielding, longer-dated U.S. Treasuries or mortgage-backed securities and earning a return on the spread between what the bond investments pay and the cost of funding. As long as the short-term rates remain low then rolling the funding over every three months to continue to fund the bond investments proves to be a lucrative investment. If interest rates start rising then the spread declines and the bond investment values also begin to move inversely in relation to the increase in interest rates. Thus, the bonds must be sold quickly so that they do not decline to a value below par and also in order to terminate the short-term borrowings. If this strategy is also used to purchase non-U.S. dollar bonds, then there is the additional opportunity to earn an additional return if the dollar is declining in value. If the dollar starts to appreciate in response to an increase in interest rates, then again the entire position must be liquidated quickly.
Laddering refers to assembling a portfolio of debt instruments with different maturities.
Historically, most municipal and corporate bonds were issued with fixed interest rates (fixed income securities) until maturity thus the analysis
of such bonds is known as fixed income analysis. It is a 3-step process:
Fixed income Securities
Corporation
Perform a conventional financial analysis / financial ratio analysis of the company or the municipality.
Equity Linked Notes are a hybrid security that resemble debt issues that are linked to an underlying stock of a corporation (either U.S. domestic common share or the ADR of a foreign corporation). At maturity, the notes are convertible into the equity shares of the corporation at a pre-determined exchange rate. Thus, although the note has a stated interest rate payment the return of principal is based on the performance of the underlying stock. The maturity of the these types on notes is approximately one to three years and they also usually have a call feature.
SPARQS (Stock Participation Accreting Redemption Quarterly-pay Securities). At maturity, holders will receive a fixed percentage share of the issuer's common stock in exchange for each SPARQS, subject to the issuer's right to call the SPARQS for the cash call price.
PERCS (Preference Equity Redemption Cumulative Stock). At maturity, PERCS can be converted into a share of an underlying common share as long as the PERC strike price is below the current market price for the common share (or a fractional share if the PERC strike price is over the market price of the common share). PERCS are preferred shares that pay a dividend higher than the common dividend prior to their conversion to common share.
Income Deposit Securities (IDS) are a combination of a company's equity and debt in a single tradeable unit.
Syndicated loans are corporate loans originated by a lead bank (Agent), perhaps along with two or three other co-lead banks (Co-Agents), and then the loan is "syndicated" to other banks who can commit to a certain level of financing as a percentage of the original closed loan. As these loans are too large for any bank the purpose of the syndication is to spread the exposure risk to a large group. Thus, the lead bank(s) reduce their overall risk (although they may have earned fees based on the original amount of their commitment). Conversely, smaller banks have an opportunity to lend to customers that may have ignored them and had no banking relationship with.
A bank or financial institution can become part of the syndication at the time of the first offering who by purchase or trade in the secondary market for the corporate loans. The loans themselves are to corporations of various credit ratings (Moody's and S&P) and some are unrated. Some small syndications (just a few banks) are known as club deals. Once closed and performing, some syndicated loans will trade at a premium or discount to the par value of the loan portion depending on the credit rating and perception in the market. When a bank / finacial institution purchases a syndicated loan in the secondary market it is known as purchasing a participation in the syndication. The formal documentation for the sale and admittance to the syndication is the Participation Agreement. There are also funds open to investors that consist of a portfolio of syndicated corporate loans.
Many syndicated loans utilize LIBOR (London Interbank Offered Rate) as the index rate for borrowings made under the terms of the Loan Agreement. A margin is added to LIBOR to compensate the Lender(s). Banks earn a profit on lending by borrowing funds at LIBOR + margin (reflecting the bank's credit rating and cost to raise funds) and lending to the borrower at LIBOR + margin higher than the bank's cost of funds. A bank also usually receives and Upfront Fee or Commitment Fee for issuing a Commitment Letter that indicates their firm commitment to participate in the syndication and lend their pro rata share of the total facility as specified and requested by the borrower. The Commitment Fee is usually a sliding scale corresponding to the amount that is committed to the total facility. Hence, a bank commiting USD$50 million will recieve a higher commitment fee than a bank commiting USD$10 million. Commitment Fees are usually measured in basis points, for instance 5 basis points (100 basis points per one percentage point / 1.00%) or 5 bps., or 0.05%. Banks will also occasionally earn an Amendment Fee when the language of the loan documents need to be revised to acommodate the request or financial condition of the borrower.
There are also unfunded syndications known as Stand-by Back-up Facility (364-Day Facility): An undrawn, stand-by facility from a bank or syndication of banks that can be drawn upon if required. This facilities are usually designed to back-up the short-term / commercial paper borrowing program of a company and are structured for 364-days so that banks do not have to make any capital reserves for the facility (as long as it remains undrawn).
Syndicated loans are reviewed annually by the Shared National Credit Program (SNC), which was established by the Borad of Governors of the Federal Resrve System, The Federal Deposit Insurance Company (FDIC), the Office of the Comptroller of the Currency and the Office of Thrift Supervision. The SNC reviews and classifies large sysndicated loans in the amount of USD$20 million of higher and syndicated between at lease three separate institutions. Syndicated loans reviewed and classified under the Uniform Loans Classification Standards and are deemed "adverse credits" or "criticized credits" recive a rating of either "Substandard", "Doubtful" or "Loss".
Please also see the Asset Securitization Page.
Assets that are assembled into pools and then securitized and financed by bonds collateralized by the pool of assets include: residential real estate / commercial real estate mortgages (mortgage-backed securities / MBS), Home Equity Loans (HELOCs / Home Equity Lines of Credit), manufactured housing, student loans, marine vessel loans (primarily recreational craft), automobiles, recreational vehicles, credit card receivables, corporate debt (CBOs), corporate bank loans (CLOs), rail road rolling stock and aircraft. What is being securitized is the loans to each individual asset and the specific collateral (real estate, automobile, etc.) that collateralizes that individual loan.
An Equipment Trust Certificate is a corporate bond that is collateralized by either an individual asset or group of assets, usually jet aircraft or railroad rolling stock.
Securities created by assembling a pool of hundreds of individual residential mortgages are called mortgage-backed securities (MBS). These MBS are assembled by GNMA, FNMA and FHLMC, and there are also what is known as private-label MBS (non-conforming mortgages).
In Canada, pools of residential mortgages are assembled for securitization through the NHA Mortgage-Backed Securities Program (NHA MBS), which are comprised of pools of amortized residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC) under the National Housing Act (NHA). NHA MBS Issuers are approved by CMHC and must be either a chartered bank, a trust company, an insurance company, a credit union, a loan company or a caisse populaire (credit unions located in Quebec).
CMO: Collateralized Mortgage Obligations that separates the pool of securities into short, medium and long-term "tranches" (categories). Interest is received up until and certain period prior to maturity which is calculated for each tranche.
REMIC: Real Estate Mortgage Investment Conduit, is a series of multi-class securities consisting of various portions of mortgage backed securities such as interest only, principal only, and other divisions of the mortgage payment stream.
Bloomberg Municipal Repository www.bloomberg.com/markets/rates/municontacts.html
CUSIP Service Bureau www.cusip.com/
DPC Data, Inc. www.munifilings.com/munifilings/IndexAction.do
Electronic Municipal Market Access system (EMMA) emma.msrb.org/
Governmental Accounting Standards Board (GASB) www.gasb.org/
Interactive Data Pricing and Reference Data, Inc. www.interactivedata-prd.com/
Internal Revenue service, Tax Exempt Bonds www.irs.gov/taxexemptbond/
Municipal Securities Rulemaking Board (MSRB) www.msrb.org/
Securities Industry & Financial Markets Association www.sifma.org/
Standard & Poor's Securities Evaluations, Inc. www.disclosuredirectory.standardandpoors.com/
Treasury Direct www.treasurydirect.gov/
U.S. Department of the Treasury, Bureau of the Public Debt www.publicdebt.treas.gov/
