Ratings – Moody’s and Standard & Poor’sPlacement – with institutionsoDirectly placed paperoDealer-placed paperSecondary Market – secondary trading is limited.Backing Commercial Paper – not asset backed.Slightly higher return than Treasury securities.Finance companies are frequent issuers.Estimating the YieldNegotiable Certificates of Deposit (NCDs) – A bank time deposit that is negotiable.Placement – corporate treasuriesPremium – often, rate is above T-bill yieldRepurchase Agreements (Repos) – sale of a short-term security with the condition that the seller will buy it back at a predetermined price.Estimating the YieldFederal Funds – commercial banks borrow and lend excess reserve balances to each other.Banker’s Acceptances – a bank accepts the responsibility to repay a loan to its holder. Facilitates international trade.Steps involved15
Chapter 7 – Bond MarketsStudent NotesMoney Market SecuritiesFinal NotesInstitutional useValuationLimited price movementsRiskGlobalization of Money MarketsPerformance of Foreign Money Market Securities16
Chapter 7 – Bond MarketsStudent NotesChapter 7 ObjectivesTo identify the different types of Treasury securitiesTo identify the characteristics of municipal securitiesTo outline the types of corporate debt securitiesTreasury SecuritiesTreasury Bills – Treasury securities with a maturity of less than one year. These are sold on a discount basis.Treasury Notes – Securities with maturities between 2 and 10 years. These are coupon securities.Treasury Bonds – Securities with maturities greater than 10 years. These are coupon securities.Treasury Inflation Protection Securities (TIPS) – A Treasury coupon security (either note or bond) whose coupon rate is tied to the rate of inflation.Primary Market – Treasuries are sold in frequent well-publicized auctions. ¤Competitive bids¤Noncompetitive bidsSecondary Market – over-the-counter market where a group of dealers offer continuous bid and as prices on outstanding Treasuries.Stripped Treasury Securities – Separating all coupon and principal payments into individual securities. For instance, a 10-year semiannual note would convert into 21 separate STRIPS.Quotations – The bid price and the ask price are quoted per hundred of dollars of par value.Salomon Brothers scandal – Salomon took over a Treasury bond auction.Brady Bonds – U.S. Treasury department restructuring program for delinquent LDC debt.Federal Agency SecuritiesFederal Agencies – generally, a private company that was originated by the federal government.17
Chapter 7 – Bond MarketsStudent Notes¤The Farm Credit System¤Housing Credit Agencies¤Export-Import Bank¤Student Loan Marketing Association (Sallie Mae)¤Small Business Administration (SBA)Municipal BondsState and local government bondsGeneral obligation bonds – provide basic services.