0001
`
`IBG 1020
`CBM of U.S. Patent No. 7,693,768
`
`
`
`IBG 1020
`CBM of U.S. Patent No. 7,693,768
`
`
`
`0002
`
`
`
`0003
`
`
`
`
`
`‘*3-W\m\r~o\oo\‘”_h\RI
`
`
`
`
`
`ultifaceted Securities Industry
`
`Chapter 4: The Exchanges
`
`FIGURE 4-2' A page in the 5Pecialist’s book.
`
`because of precedence, and B
`age.
`
`both fill the order and both
`, there isn't any logical way
`ty. In this case, either the
`'
`or they flip a coin and
`
`1 market order for 100 shares,
`crowd with a sell market order
`nce Brokers N and O can fill or
`advantage, they have parity. So
`hese two taking the 100 shares
`. executes 100 shares.
`
`thefloor is cleared, all remain-
`be resubmitted. This proce-
`affirming all orders.
`
`are away from the market, in
`r they are received.
`
`st’s book represents the highest
`0 uote is 22 1 / 4-5 / 8. The highest
`hese orders are the only shares
`9. The largest order for a buy at
`- ncl 300 by Broker E). The largest
`0 by Broker F and 600 by Broker
`
`In their books by price on a
`first order in is the first order
`
`with a 200—share buy order at the
`roker F's 300-share order at 225/8-
`
`0004
`
`
`
`0005
`
`
`
`CHAPTER 21
`
`Corporate
`Bonds and Notes
`
`Type: Debt
`
`Form: Registered (usually)
`Denomination: Terms established in indenture (usually
`$1,000)
`Income payment: Interest
`
`Traded: Stock exchanges or OTC
`Duration: Varies, usually a 30-year maximum
`
`Market conditions, the dilution of ownership, and a host of
`other reasons may lead a corporation to decide against issuing
`shares of stock to raise capital. Instead, because the corporation is
`a legal individual, it borrows money from the public sector in its
`own name.
`
`0 Corporations borrow long-term capital through debt instru-
`ments known as bonds.
`
`0 They borrow intermediate-term financing through notes.
`0 Short-term financing, referred to as commercial loans, i? at’
`ranged through commercial banks. (Some corporations:
`especially finance corporations, issue a short-term insm‘
`ment known as commercial paper.)
`
`0006
`
`
`
`0007
`
`
`
`0008
`
`
`
`0009
`
`
`
`176
`
`Part 3: iypes of Securities
`
`equals a 2% profit. On the other hand, if the return on the investment
`turns out to be only 7%, the corporation will lose 1% on the borrowed
`sum: 8% cost of money less 7% return equals 1% loss.
`
`PAYMENT OF INTEREST
`
`Interest is paid to bondholders usually on a semiannual basis.
`The periods are:
`
`0 January and ]uly (]&z]).
`0 February and August (F&A).
`0 March and September (M&S).
`n April and October (A&O).
`- May and November (M&N).
`0 June and December (]&D).
`
`The actual payment date can be any day of the month, but it
`is the same day throughout the life of the instrument. For ex-
`ample, an F&A 15 pays interest on February 15 and August 15; an
`A&O (no date mentioned) pays April 1 and October 1. Because
`most bonds may pay interest on the first day of the interest
`month, the number "1" is often omitted; such bonds are referred
`to simply as ”A&O,” "M&N,” and so on.
`Corporate bonds are traded on national exchanges as well as
`over the counter. The typical bond transaction settles regular way,
`five business days after trade date.
`Bonds trade at the market price plus accrued interest. When
`you buy a bond, you pay the agreed-upon price plus whatever
`interest has accrued to the former owner (the seller) of the bond.
`Let's look at the price of the bond first.
`
`Priciag of a Corporate Bond
`
`The quoted price of the bond represents a percentage of the
`face value, or par value.
`Example: An XYZ bond is quoted 96-1/2. In other words, the bond is
`trading at 96% to 961/2% of the par value. For a $1,000 par value bond» 3
`seller with a market order receives $960 ($1,000 x .96). A buyer with a
`market order pays $965.00 ($1,000 X .965).
`
`0010
`
`
`
`0011
`
`
`
`178
`
`Part 3: Types ofSecurities
`
`security environment, many other formulas are used to calculate
`different yields, such as yield-to-maturity or yield-to~first sinking
`fund. We do not explore these formulas here.
`
`Accrued Interest
`
`The trade price, however, is only part of what you pay the seiler.
`You must also pay any interest that has accrued to the seller since
`the last interest payment.
`Interest is computed on a 360-day basis, with each half-year
`interest period comprising 180 days.
`
`Example: An 8% bond pays $80 per year per $1,000 of face value, or $40
`serniannually.
`
`Interest continues to accrue to the bond’s seller up to but not
`including settlement day, on which date the accrued interest is
`paid to the seiler. The formula for calculating accrued interest is:
`
`Accrued
`interest
`
`:
`
`Face amount
`of bond
`
`X
`
`Rate of
`interest X
`
`Number of days
`bond is owned
`360
`
`Example: On April 4, you purchase $1,000 XYZ 8% A&O 2005 @ 96,
`which settles on April 11. Because the bond pays interest on April 1 and
`October 1 (A&O), you owe the seller interest from April 1 through April
`10. Counting the days from April 1, the first day of the interest period,
`up through but not including the settlement date of April 11, you get 10
`days. You owe 10 days of interest. Let's calculate the accrued interest:
`
`Accrued
`interest
`
`Face Amount
`$1,000
`
`X
`
`Interest Rate
`8
`1—06
`
`Days
`_10
`360
`
`= $2.23
`
`You pay the seller $960 (.96 X $1,000 face value) plus the accrued
`interest of $2.23.
`On August 29, you sell the bonds at a price of 96 for settlement on
`September 5.
`Now let's see the calculations on the sale of the bond. From April
`11 through September 4, you accrue interest. Counting from April 11
`through but not including the settlement date of September 5, you get
`144 days, during which interest has accrued to you. You are entitled to
`144 days of accrued interest.
`
`0012
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