:: wikimiki.org ::

Bond

Bond

---- In finance, a bond is a debt security, that is the issuer owes the holders a debt and is obliged to pay the principal and interest (the coupon), together with other obligations under the term of the issue, such as the obligation to give certain information. Bonds are generally issued for a fixed term (the maturity) longer than one year. A bond is just a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender and the coupon to the interest. Debt securities with a maturity shorter than one year are typically bills, certificates of deposit or commercial paper, and considered money market instruments. Traditionally, the U.S. Treasury uses the word bond only for their issues with a maturity longer than ten years, and calls issues between one and ten year notes. Elsewhere in the market this distinction has disappeared, and both bonds and notes are used irrespective of the maturity. Market participants use bonds normally for large issues offered to a wide public, and notes rather for smaller issues originally sold to a limited number of investors. There are no clear demarcations. Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the issuer. Also bonds have a definite lifespan, their maturity, whereas stocks may be held indefinitely. An exception is a console bond, which is a perpetuity.

Issuers

The range of issuers of bonds is very large. Almost any organization could issue bonds, but the underwriting and legal costs can be prohibitive. Regulations to issue bonds are very strict. Issuers are often classified as follows:
- Supranational agencies, such as the European Investment Bank or the Asian Development Bank issue Supranational bonds.
- National Governments issue Government bonds in their own currency. These are often called risk-free bonds. They also issue sovereign bonds in foreign currencies.
- Provincial, state or local authorities (municipalities). In the U.S. they issue what are known as municipal bonds
- Government sponsored entities in the U.S., such as the Federal Home Loan Mortgage Corporation (Freddie Mac) issue Agency bonds, commonly known as Agencies.
- Companies (corporates) issue Corporate bonds.
- Special purpose vehicles are companies set up for the sole purpose of containing assets against which bonds are issued, often asset-backed securities

Issuing bonds

Bonds are issued by governments or other public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process of issuing bonds is through underwriting. One or more banks, forming a syndicate, underwrite the bonds, and sell them on to their customers. Government bonds are typically auctioned. Bonds enable the issuer to finance long-term investments with external funds.

Features of bonds

The most important features of a bond are:
- nominal, principal or face amount - the amount over which the issuer pays interest, and which has to be repaid at the end.
- issue price - the price at which investors buy the bonds when they are first issued. The net proceeds that the issuer receives, are calculated as the issue price, less the fees for the underwriters, times the nominal amount.
- maturity date - the date on which the issuer has to repay the nominal amount. After the maturity date the issuer has no more obligations to the bond holders, as long as all payments have been made of course. The length of time until the maturity date is often referred to as the term or simply maturity of a bond. The maturity can be any length of time, although debt securities with a term of less than one year are generally designated money market instruments rather than bonds. Most bonds have a term of up to thirty years. Some bonds have been issued with maturities of up to one hundred years, and some even do not mature at all. These are called perpetuities. In early 2005, a market developed in euros for bonds with a maturity of fifty years. In the market for U.S. Treasury securities, there are three groups of bond maturities:
- short term (Bills): maturities up to one year
- medium term (Notes): maturities between one and ten years
- long term (Bonds): maturities greater than ten years
- coupon - the interest rate that the issuer pays to the bond holders. Usually this rate is fixed throughout the life of the bond. It can also vary with a money market index, such as LIBOR, or indeed it can be more exotic. The name coupon originates from the fact that in the past, physical bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment.
- coupon dates - the dates on which the issuer pays the coupon to the bond holders. In the U.S., most bonds are semi-annual, which means that they pay a coupon every six months. In Europe, most bonds are annual and pay only one coupon a year.
- callability - Some bonds give the issuer the right to repay the bond before the maturity date on the call dates. These bonds are referred to as callable bonds. Most callable bonds allow the issuer to repay the bond at par. With some bonds, the issuer has to pay a premium, the so called call premium. This is mainly the case for high-yield bonds. These have very strict covenants, restricting the issuer in its operations. To be free from these covenants, the issuer can repay the bonds early, but only at a high cost.
- puttability - Some bonds give the bond holder the right to force the issuer to repay the bond before the maturity date on the put dates.
- call dates and put dates - the dates on which callable and puttable bonds can be redeemed early. There are three main categories.
- A Bermudan callable has several call dates, usually coinciding with coupon dates.
- A European callable has only one call date. This is a special case of a Bermudan callable.
- An American callable can be called at any time until the maturity date.
- indenture - a document specifying the rights of bond holders. In the U.S. federal and state securities and commercial laws apply to the enforcement of those documents, which are construed by courts as contracts. The terms may be changed while the bonds are outstanding, but amendments to the governing document often require approval by a majority vote of the bond holders.

Types of bond

- Fixed rate bonds have a coupon that remains constant throughout the life of the bond.
- Floating rate notes (FRN's) have a coupon that is linked to a money market index, such as LIBOR or EURIBOR, for example three months USD LIBOR +0.20%. The coupon is then reset periodically, normally every three months.
- Convertible bonds can be converted, on the maturity date, into another kind of security, usually common stock in the company that issued the bonds.
- High yield bonds are bonds that are rated below investment grade by the credit rating agencies. As these bonds are relatively risky, investors expect to earn a higher yield, hence the name high yield bonds. Those market participants that want to emphasize the risky nature of the bonds, also call them junk bonds.
- Zero coupon bonds do not pay any interest. They trade at a substantial discount from par. The bond holder receives the full principal amount on the maturity date. An example of zero coupon bonds are Series E savings bonds issued by the U.S. Government. Zero coupon bonds may be created from fixed rate bonds by financial institutions by "stripping off" the coupons. In other words, the coupons are separated from the final principal payment of the bond and traded independently.
- Inflation linked bonds, in which the principal amount is indexed to inflation. The interest rate is lower than for fixed rate bonds with a comparable maturity. However, as the principal amount grows, the payments increase with inflation. The government of the United Kingdom was the first to issue inflation linked Gilts in the 1980's. Treasury Inflation-Protected Securities (TIPS) and I-bonds are examples of inflation linked bonds issued by the U.S. Government.
- Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. Examples of asset-backed securities are mortgage-backed securities (MBS), collateralized mortgage obligations (CMO) and collateralized debt obligations (CDO).
- Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. In case of bankruptcy, there is a hierarchy of creditors. First the liquidator is paid, then government taxes, etc. The first bond holders in line to be paid are those holding what is called senior bonds. After they have been paid, the subordinated bond holders are paid. As the expectation that you get paid back is lower, the risk is higher. Therefore, subordinated bonds have a lower credit rating then senior bonds. The main examples of subordinated bonds can be found in bonds issued by banks, and asset-backed securities. The latter are often issued in tranches. The senior tranches get paid back first, the subordinated tranches later.
- Perpetual bonds are also often called perpetuities. They have no maturity date. The most famous of these are the UK Consols, which are also known as Treasury Annuities or Undated Treasuries. Some of these were issued back in 1888 and still trade today.

Trading and valuing bonds

The interest rate that the issuer of a bond must pay is influenced by a variety of factors, such as current market interest rates, the length of the term and the credit worthiness of the issuer. Since these factors are likely to change over time, the market value of a bond can vary after it is issued. Because of these differences in market value, bonds are priced in terms of percentage of par value. Bonds are not necessarily issued at par (100% of face value), but all bonds will trade at par at the moment before they reach maturity. At other times, prices can either rise (bond is priced at greater than 100), which is called trading at a premium, or fall (bond is priced at less than 100), which is called trading at a discount. Most government bonds are denominated in units of $1000, if in the United States, or in units of one hundred pounds, if in the United Kingdom. Hence, a deep discount US bond, selling at a price of 75.26, indicates a selling price of $752.60 per bond sold. (Often, bond prices are quoted in points and thirty seconds of a point, rather than in decimal form.) Some short-term bonds, such as the U.S. T-Bill, are always issued at a discount, and pay par amount at maturity rather than paying coupons. This is called a discount bond. The market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond's yield, or rate of return. The yield represents the current market interest rate for bonds with similar characteristics. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices generally fall and vice versa. The market price of a bond may include the accrued interest since the last coupon date. (Some bond markets include accrued interest in the trading price and others add it on explicitly after trading.) The price including accrued interest is known as the "flat" or "tel quel price". (See also Accrual bond.) The interest rate adjusted for the current price of the bond is called the "current yield" or "earnings yield" (this is the nominal yield multiplied by the par value and divided by the price). Taking into account the expected capital gain or loss (the difference between the current price and the redemption value) gives the "redemption yield": roughly the current yield plus the capital gain (negative for loss) per year until redemption. The relationship between yield and maturity for otherwise identical bonds is called a yield curve.

See

- Bond valuation

Investing in bonds

Bonds are bought and traded mostly by institutions like pension funds, insurance companies and banks. Most individuals who want to own bonds do so through mutual funds. Still, in the U.S., nearly ten percent of all bonds outstanding are held directly by households. Bonds are generally viewed as safer investments than stocks, but this perception is only partially correct. Bonds do suffer from less day-to-day volatility than stocks, and bonds' interest payments are higher than dividend payments that the same company would generally choose to pay to its stockholders. Bonds are liquid — it is fairly easy to sell one's bond investments, though not nearly as easy as it is to sell stocks — and the certainty of a fixed interest payment twice per year is attractive. Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back, whereas the company's stock often ends up valueless. However, bonds can be risky:
- Fixed rate bonds are subject to interest rate risk, meaning they will decrease in value when the generally prevailing interest rate rises (the opposite is true for bonds with negative convexity e.g bonds that allow for prepayment such as mortgage-backed securities). When the market's interest rates rise, then the market price for bonds will fall, reflecting investors' improved ability to get a good interest rate for their money elsewhere — perhaps by purchasing a newly issued bond that already features the newly higher interest rate. This drop in the bond's market price does not affect the interest payments to the bondholder at all, so long-term investors need not worry about price swings in their bonds. However, price changes in a bond immediately affect mutual funds that hold these bonds. Many institutional investors have to "mark to market" their trading books at the end of every day. If the value of the bonds held in a trading portfolio has fallen over the day, the "mark to market" value of the portfolio may also have fallen. This can be damaging for professional investors such as banks, insurance companies, pension funds and asset managers. If there is any chance a holder of individual bonds may need to sell his bonds and "cash out" for some reason, interest rate risk could become a real problem. (Conversely, bonds' market prices would increase if the prevailing interest rate were to drop, as it did from 2001 through 2003.) One way to quantify the interest rate risk on a bond is in terms of its duration.
- Bonds prices can become volatile if one of the credit rating agencies like Standard & Poor's or Moody's upgrades or downgrades the credit rating of the issuer. A downgrade can cause the market price of the bond to fall. As with interest rate risk, this risk does not affect the bond's interest payments, but puts at risk the market price, which affects mutual funds holding these bonds, and holders of individual bonds who may have to sell them.
- A company's bondholders may lose much or all their money if the company goes bankrupt. Under the laws of the United States and many other countries, bondholders are in line to receive the proceeds of the sale of the assets of a liquidated company ahead of some other creditors. Bank lenders, deposit holders (in the case of a deposit taking institution such as a bank) and trade creditors may take precedence. There is no guarantee of how much money will remain to repay bondholders. As an example, after an accounting scandal and a Chapter 11 bankruptcy at the giant telecommunications company Worldcom, in 2004 its bondholders ended up being paid 35.7 cents on the dollar. In a bankruptcy involving reorganization or recapitalization, as opposed to liquidation, bondholders may end up having the value of their bonds reduced, often through an exchange for a smaller number of newly issued bonds.
- Some bonds are callable, meaning that even though the company has agreed to make payments plus interest towards the debt for a certain period of time, the company can choose to pay off the bond early. This creates reinvestment risk, meaning the investor is forced to find a new place for his money, and the investor might not be able to find as good a deal, especially because this usually happens when interest rates are falling.

Arguments against bonds

Some theories of economics, notably Islamic economics and green economics, argue that the overall effect of any debt on ecosystems and society is so negative that no bond should have any legal status. These theories are part of a broader category called creditary economics. In these, there is no creditor, only a joint venture partner or investor. Remnants of this same belief still exist even today in Western finance and legal precedents, as seen in usury laws, mortgage laws, and also as seen in perpetual bonds. At the time of issue during the late Middle Ages, many perpetual bonds were sold not as debt instruments but rather as an income stream or annuity instrument. One was buying a future income, not lending money. By this thinking, no interest was paid on perpetual bonds, despite the existence of a yield for such financial instruments.

External links

- [http://bonds.yahoo.com/bond_ed.html Bonds 101], bonds.yahoo.com
- [http://bonds.yahoo.com/glossary1.html Bond Glossary], bonds.yahoo.com
- [http://www.bondknowledge.com/ BondKnowledge.com], Bond information and resources
- [http://thisMatter.com/money/Bonds/Bonds.htm Complete Introduction to Bonds] — A complete, but concise, tutorial about bonds in a one-page format with sidebars, illustrations, formulas, examples, and clear definitions of basic terms.
- [http://invest-faq.com/articles/index-bonds.html Invest FAQ:Bonds:Index]
- [http://www.investinginbonds.com InvestingInBonds.com], lots of good information for beginning and advanced bond investors.
- [http://www.greekshares.com/bonds.asp Investing in Bonds]
- [http://www.dmo.gov.uk/ UK Debt Management Office]
- [http://www.deutsche-finanzagentur.de/eng/ German Finance Agency]
- [http://www.jwsuretybonds.com/surety_info.htm Surety bond information by type.]

Math

- [http://www.gummy-stuff.org/bonds.htm Bonds]
- Category:Accounting ja:債券

Debt

Debt is that which is owed. A person or company owing debt is called a debtor. An entity to whom debt is owed is called a creditor. Debt is used to borrow purchasing power from the future. Companies use debt as a part of their overall corporate finance strategy.

Payment

People or organisations often enter into agreements to borrow something. Both parties must agree on some standard of deferred payment, most usually a sum of money denominated as units of a currency, but sometimes a like good. For instance, one may borrow shares, in which case, one may pay for them later with the shares, plus a premium for the borrowing privilege, or the sum of money required to buy them in the market at that time.

Types of debt

There are numerous types of debt obligations. They include loans, bonds, mortgages and promissory notes. It is common to borrow large sums for major purchases, such as a mortgage, and pay it back with an agreed premium interest rate over time, or all at once at a later date (balloon payment). The amount of money outstanding is usually called a debt. The debt will increase through time if it is not repaid faster than it grows. In some systems of economics this effect is termed usury, in others, the term "usury" refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted. Large organizations can issue debt in the form of securities, known as bonds. Each bond entitles the holder to interest and principal repayments. Bonds are traded in the bond markets, and are widely used as relatively safe investments. Securitization Securitization occurs when a company lumps together a group of assets or receivables usually in different tranches determined by the riskiness of the debtor and sells them to the market through a trust. The cash flows from these receivables are used to pay the holders of this paper. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. Although these assets are "removed" from the balance sheet and are supposed to be the responsibility of the trust, that does not end the company's involvement because the company often maintains what is called an interest only strip or first lost piece in the securitization. The piece that the company maintains gets hit first with any losses the trust may incur before any of the other investors see a loss, meaning that the investor in a securitization would get paid in case there are massive defaults and the company who securitized the assets would not get paid on its portion. The aforementioned brings into question whether the assets are truly of balance sheet given the company's commitment to keeping losses to investor at a minimum. Many rating agencies consider securitization debt because of their commitment to keeping these trusts loss free. If it has a cash flow coming in it can be securitized.

Debt, inflation and the exchange rate

As noted above, debt is normally denominated in a particular monetary currency, and so changes in the valuation of that currency can change the effective size of the debt. This can happen due to inflation or deflation, so it can happen even though the borrower and the lender are using the same currency. Thus it is important to agree on standards of deferred payment in advance, so that a degree of fluctuation will also be agreed as acceptable. It is for instance common to agree to "US dollar denominated" debt. The form of debt involved in banking gives rise to a large proportion of the money in most industrialised nations (see money and credit money for a discussion of this). There is therefore a complex relationship between inflation, deflation, the money supply, and debt. The store of value represented by the entire economy of the industrialized nation itself, and the state's ability to levy tax on it, acts to the foreign holder of debt as a guarantee of repayment, since industrial goods are in high demand in many places worldwide.

Inflation indexed debt

Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and are used in some countries. For example, the US government issues two types of inflation-indexed bonds, Treasury Inflation-Protected Securities (TIPS) and I-bonds. These are one of the safest forms of investment available, since the only major source of risk — that of inflation — is eliminated. A number of other governments issue similar bonds, and some did so for many years before the US government. In countries with consistently high inflation, ordinary borrowings at banks may be inflation indexed also.

Debt ratings, risk and cancellation

Risk free interest rate

Main article: risk-free interest rate Lendings to stable financial entities such as large companies or governments are often termed "risk free" or "low risk" and made at a so-called "risk-free interest rate". This is because the debt and interest are highly unlikely to be defaulted. A textbook example of such risk-free interest is a US Treasury security - it yields you the minimum return available in economics, but you get the security of the knowledge that the US has never defaulted on its debt instruments. A risk-free rate is commonly used in setting floating interest rates, floating interest rate is usually calculated as risk-free interest rate plus a bonus to the creditor based on the creditworthiness of the debtor. However if the real value of a currency has changed in the meantime, the purchasing power of the money repaid may vary considerably from that which was expected at the commencement of the loan. So from a practical investment point of view, there is still considerable risk attached to "risk free" or "low risk" lendings. The real value of the money may have changed due to inflation, or, in the case of a foreign investment, due to exchange rate fluctuations. The Bank for International Settlements is an organisation of central banks that sets rules to define how much capital banks have to hold against the loans they give out.

Ratings and creditworthiness

Debt of countries as well as private corporations is rated by rating agencies, such as Moody's, A.M. Best and Standard & Poor's. These agencies assess the ability of the debtor to honor his obligations and accordingly give him a credit rating. Moody's for example uses the letters Aaa Aa A Baa Ba B Caa Ca C, where ratings Aa-Caa are qualified by numbers 1-3. Munich Re, for example, currently is rated Aa3 (as of 2004). S&P and other rating agencies have slightly different systems using capital letters and +/- qualifiers. A change in ratings can strongly affect a company, since its cost of refinancing depends on its creditworthiness. Bonds below Baa/BBB (Moody's/S&P) are considered junk- or high risk bonds. Their high risk of default is compensated by higher interest payments. Bad Debt is a loan that can not (partially or fully) be repaid by the debtor. The debtor is said to default on his debt. These types of debt are frequently repackaged and sold below face value.

Cancellation

Short of bankruptcy, very often debts are wholly or partially forgiven. Traditions in some cultures demand that this be done on a regular (often annual) basis, in order to prevent systemic inequities between groups in society, or anyone becoming a specialist in holding debt and coercing repayment. International Third World debt has reached the scale that many economists are convinced that debt cancellation is the only way to restore global equity in relations with the developing nations.

Effects of debt

Debt allows people and organisations to do things that they otherwise wouldn't be able or allowed to. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their private equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the higher more debt per equity, the riskier. Debt as a whole is a sign of optimism, a society believes in its future (earnings especially), and of lack of work ethic, a society postpones the solution to present problems (when it compensates a fall in revenues, perceived as short term, by an increase in debt for instance) Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess in debt, equivalent to excessive expectations on future returns, accompanied asset bubbles (stock market). When expectations corrected, deflation and credit crunch followed. Deflation effectively made debt more expansive and as Fisher explained this reinforced deflation again. In order to reduce their debt level, economic agents reduced their consumption and investetment. The reduction in demand reduced business activity and caused further unemployment. Also in a direct sense, more bankruptcies occurred due to increased debt cost caused by deflation, and the reduced demand. It is possible for some organisations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the lender hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt. See: Perils of the debt-propelled economy by Henry C K Liu http://www.atimes.com/atimes/Global_Economy/DI14Dj01.html

Arguments against debt

Main article: Criticism of debt Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Economics criticism focuses on debt fostering inequality. Muslim religion forbids lending with interest, the catholic church long did, and the torah wrote that all debts had to be erased every 7 years and every 50 years. Debt from a religious view point is condemned because by tying past and future it cuts from the present where God is to be found. Feminism concentrates on the perceived coercive nature of debt contracts. Environmental critics point out the disparity between material use of resources from economic growth and the limited resources of natural production. Examples would be the low ecological yield of natural resources and the limited usable energy from the sun.

Levels and flows

Main article: debt levels and flows Global debt underwriting grew 4.3% year-over-year to $5.19 trillion during 2004.

External links

- [http://www.oecd.org/site/0,2865,en_21571361_31596493_1_1_1_1_1,00.html OECD country debt]
- [http://www.free-debt-consultation.com Consumer debt help]
- [http://www.upsprd.com Information about Debt and Loans] Category:Credit Category:Core issues in ethics ja:負債

Security (finance)

Security is a type of transferable interest representing financial value. Traditionally, securities have been categorized into debt and equity securities, and between bearer and registered securities. The uses that are made of securities have changed over time, both for the issuer and for the holder. Though the purpose of capital raising has sometimes been taken to be a defining characteristic of securities, its uses have expanded greatly in modern times. They are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, other derivatives, limited partnership units, and various other formal "investment instruments." Banknotes, checks, and some bills of exchange do not fall into this category. Transferable interest in commodities like oil, food grains or metals can also be referred to as securities. One can enter into contracts to buy or sell various quantities of commodities in various commodity exchanges. These become transferrable interest in the particular commodity

Concept of "security"

Originally the term "securities" was used to denote security interests (such as mortgages and charges) supporting the payment of a debt or other obligation. In Early modern Europe, companies and government agencies began to raise capital from the public using secured debt obligations, which came to be known as "securities". As shares became more readily transferrable from the Victorian era, their functional similarity to debt securities became clearer, and both forms of investment became known as "securities". More recently, the term has also been extended to include units in investment funds and other forms of readily transferrable investment. The concept of "securities" should be distinguished from "interests in securities". The latter are the assets of a client from whom an intermediary holds securities on an unallocated basis, commingled with the interests in securities of other clients. The distinction between securities and interests in securities is often overlooked in practice, although it is a source of legal risk.

Uses of securities

For the issuer

Issuers of securities include commercial companies, government agencies, local authorities and international and supranational organisations (such as the World Bank). Debt securities issued by government (called government bonds or sovereign bonds) generally carries a lower interest rate than corporate debt issued by commercial companies. Repackaged securities are usually issued by a company established for the purpose of the repackaging - called a special purpose vehicle (SPV). New capital: Commercial enterprises have traditionally used securities as a means of raising new capital. Securities are an attractive option relative to bank loans, which tend to be relatively expensive and short term. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of control over the business of the borrower via financial covenants. Through securities, capital is provided by investors who purchase the securities. In a similar way, government will raise capital from securities (see government debt) if taxation and other income are insufficient to meet public expenditure. This will result in a budget deficit. Repackaging: In recent decades securities have been issued to repackage existing assets. In a traditional securitisation, a financial institution may wish to remove assets from its balance sheet in order to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way which makes them more attractive to investors.

For the holder

Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds. Investment: The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment. Collateral: The last decade has seen an enormous growth in the use of securities as collateral. Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A. These property rights enable A to satisfy its claims in the event that B becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks and government agencies are significant collateral takers.

Debt and equity

Securities are traditionally divided into debt securities and equities.

Debt

The holder of a debt security, typically a bond, is owed a debt by the issuer and is entitled to the payment of principal and interest, together with other personal rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds. In addition to serving as a source of finance for governments, treasuries are used to manage the money supply in the money market operations of central banks. Money market instruments are short term debt instruments, such as certificates of deposit, commercial paper and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Eurosecurities are securities issued internationally outside their domestic market. They include eurobonds and euronotes. Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit.

Equity

An equity is an ordinary share in a company. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer.
- Stock

Hybrid

Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. Convertibles are bonds which can be converted, at the election of the bondholder, into another sort of security such as equities. Equity warrants are contractual entitlements to purchase shares on pre-determined terms. They are often issued together with bonds or existing equities, but are detachable from them and separately tradeable.

Securities markets

Primary and secondary markets

The securities markets can be divided into the primary markets and the secondary markets. Primary markets (also known as capital markets) comprise of new securities to their first holders. The issue of new securities is commonly known as an Initial Public Offering (IPO). Issuers usually retain investment banks to assist them in finding buyers for these issues, and in many cases, to buy any remaining interests themselves. This arrangement is known as underwriting. In recent years the business of managing or underwriting issues of securities has been concentrated in the hands of a small number of investment banks, the most prominent of which are Goldman Sachs, Morgan Stanley and Merrill Lynch. The International Primary Markets Association (IPMA) is the trade association of banks and other investment institutions who are active in the primary markets. Transferability is an essential characteristic of securities. This trading is called the aftermarket or secondary market. Secondary markets often consist of what is called an exchange to facilitate the meeting of buyers and sellers. They are often referred to as stock exchanges, even though there are exchanges such as the Chicago Board of Options Exchange, where no stocks are traded. The International Securities Market Association (ISMA) is the trade association for the banks and other investment institutions that are active in the secondary markets.

Public offers and private placements

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of persons in a private placement. Often a combination of the two is used. The distinction between the two is important to securities regulation and company law. Another category, sovereign debt, is generally sold by auction to a specialised class of dealers.

Listing and OTC dealing

Securities are often listed in a stock exchange, an organised and officially recognised market on which securities can be bought and sold. Issuers may seek listings for their securities in order to attract investors, by ensuring that there is a liquid and regulated market in which investors will be able to buy and sell securities. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.

International debt markets

London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerised systems called Euroclear (in Belgium) and Clearstream (formerly Cedelbank in Luxembourg).

Legal nature of securities

Bearer and registered securities

Bearer securities

Bearer securities are issued in the form of a paper instrument. On the face of the instrument is written the promise of the issuer to pay the bearer of the instrument. By a legal fiction, the instrument is deemed to constitute the debt of the issuer, and not merely to represent them. In the absence of computerisation, bearer securities constitute tangible assets (or chose in possession). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the United Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the Exchange Control Act 1947 until 1963.

Registered securities

In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. The issuer maintains a register (usually maintained by an appointed registrar) in which details of the holder of the securities are entered and updated as appropriate. In recent years, registers have generally become computerised. Unlike bearer securities, registered securities comprise of a bundle of intangible rights (chose in action) including the right of the shareholder to share in all the assets of a company, subject to all the liabilities of the company. A transfer of registered securities is effected by amending the register. Traditionally, the delivery of bearer instruments by way of pledge has been widely used in the securities markets to collaterise financial exposures. The delivery of certificates to registered securities has also been widely used in collateral arrangements. However, because registered securities are not tangible assets, the legal effect of such a delivery is generally characterised not as pledge, but rather equitable mortgage.

Divided and undivided securities

The terms "divided" and "undivided" relate to the proprietary nature of a security. Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A share represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.

Fungible and non-fungible securities

The terms "fungible" and "non-fungible" relate to the way in which securities are held. If an asset is fungible, this means that when such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the identical asset. In other words, the redelivery of fungibles is equivalent and not in specie (identical). Undivided securities are always fungible by logical necessity. Divided securities may or may not be fungible, depending on market practice. The clear trend is towards fungible arrangements.

Regulation

In the United States, the offer and sale of securities is either registered pursuant to a registration statement that is filed with the U.S. Securities and Exchange Commission (SEC) or are offered and sold pursuant to an exemption therefrom. Dealing in securities is heavily regulated by both the federal authorities (SEC) and state authorities. In addition the industry is heavily self policed by Self Regulatory Organizations (SRO's), such as the NASD or the MSRB. Due to the difficulty of creating a general definition that covers all securities, the SEC attempts to define "securities" exhaustively (and not very precisely) as: "any note, stock, treasury stock, security future, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or 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 instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or bankers' acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." - Section 3a item 10 of the 1934 Act. The US Courts have developed a broad definition for securities that must then be registered with the SEC. There is an investment of money, a common enterprise and expectation of profits to come primarily from the efforts of others. See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner Enterprises, Inc.

Coupon

In marketing a coupon is a ticket or document that can be exchanged for a financial discount or rebate when purchasing a product. Customarily, coupons are issued by manufacturers of consumer packaged goods or by retailers, to be used in retail stores as a part of sales promotions. They are often widely distributed through mail, magazines, newspapers and the Internet. Internet coupons have become very popular as of late, because the cost is borne by the user (who has to print off the coupons themselves) as opposed to the businesses issuing the coupons. In finance, coupons are "attached" to bonds, either physically (as with old bonds) or electronically. Each coupon represents a predetermined payment promised to the bond-holder in return for his or her loan of money to the bond-issuer. (The bond-holder is typically not the original lender, but receives this payment anyway.) The coupon rate (the amount promised per dollar of the face value of the bond) helps determine the interest rate or yield on the bond. The phrase "coupon clipper" can refer to either a bond-owner or someone who uses coupons from newspapers. Another type of coupon is the trading stamp. It was used as a temporary currency for some former Soviet countries, especially Moldova (used until 1993, replaced by Moldovan lei), and Ukraine (replaced by hryvnia in 1996) after they became independent (nation). The term "coupon" is also used in manufacturing and material science to refer to a small piece of material used for testing or further processing, compare billet. zh-cn:优惠券 category:Sales promotion category:Bonds

Loan

:This page is about the financial instrument. See also loanword (linguistics), interlibrary loan. A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular installments, to the lender. This service is generally provided at a cost, referred to as interest on the debt. Acting as a provider of loans is one of the principal task for financial institutions. For banks loans are generally funded by deposits. For other institutions issuing of debt contracts, such as bonds is a typical source of funding. Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A mortgage is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can repossess the house and sell it, to get their money back. The abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over him or her.

Equity

right Equity is the name given to the portion of the legal system, in countries following the English common law tradition, that resolves disputes between persons by resorting to principles of conscience, fairness and justness. Equity comes into play typically when none of the parties to the dispute has done anything against the law, but their rights or claims are in conflict. Thus, it is to be contrasted with "law," which refers to both "statutory law" (the laws enacted by Parliament), and the "case law" (the principles set forth in the opinions given by judges when they decide cases).

History

The concept of "law" as opposed to "equity" is an accident of history. The "law courts" or "courts of law" were the courts all over England that enforced the king's laws in medieval times. At the end of the 13th century, under political pressure from the nobility, the courts of law gradually froze the types of claims they would hear, and the procedure that governed the hearing of those claims. Because the range of legal claims at that time was quite narrow, legal procedures were painfully hypertechnical, and jurors were often bribed, the result was that many meritorious plaintiffs were denied relief. However, remedies could also be obtained through filing a petition with the king, who held residual judicial power; these filings were usually phrased in terms of throwing oneself upon the king's mercy or conscience. Eventually, the king began to regularly delegate the function of resolving such petitions to the Chancellor, an important member of the King's Council. At the time, the Chancellor was usually a clergyman and the King's confessor, so he was literally the keeper of the King's conscience. Soon the Chancery, the Crown's secretarial department, began to resemble a judicial body and became known as the "Court of Chancery". By the 15th century, the judicial power of the Chancery was recognised. Equity, as a body of rules, varied from Chancellor to Chancellor, until the end of the 16th century. After the end of the 17th century only lawyers were appointed to the office of Chancellor. One area in which the Court of Chancery assumed a vital role was the enforcement of uses, a role which the rigid framework of land law could not accommodate. This role gave rise to the basic distinction between legal and equitable interests.

Distinction between law and equity

In modern practice, perhaps the most important distinction between law and equity is the remedies each offers. The most common remedy a court of law can award is money damages. Equity, however, enters injunctions or decrees directing someone either to act or to forebear from acting. Often this form of relief is in practical terms more valuable to a litigant. A plaintiff whose neighbor will not return his only milk cow, which wandered onto the neighbor's property, for example, may want that particular cow back and not just its monetary value. Law courts also enter orders, called "writs" (such as a writ of habeas corpus) but they are less flexible and less easily obtained than an injunction. Another distinction is the unavailability of a jury in equity. Equitable remedies can only be dispensed by a judge as it is a matter of law and not subject to the intervention of the jury as trier of fact. The distinction between "legal" and "equitable" relief is an important aspect of common law systems, including the American legal system. The right of jury trial in civil cases is guaranteed by the Seventh Amendment of the Constitution, but only in cases that traditionally would have been handled by the law courts at Common Law. The question of whether a case should be determined by a jury depends largely on the type of relief the plaintiff requests. If a plaintiff requests damages in the form of money or certain other forms of relief, such as the return of a specific item of property, the remedy is considered legal, and the American Constitution guarantees a right to a trial by jury. On the other hand, if the plaintiff requests an injunction, declaratory judgment, specific performance or modification of contract, or other non-monetary relief, the claim would usually be one in equity. A final important distinction between law and equity is the source of the rules governing the decisions. In law, decisions are made by reference to legal doctrines or statutes. In contrast, equity, with its emphasis on fairness and flexibility, has only general guides, known as the maxims of equity. Indeed, one of the historic criticisms of equity as it developed was that it had no fixed rules of its own and each Lord Chancellor (who traditionally administered the courts of equity on behalf of the King) gave judgment according to his own conscience. John Selden, an eminent seventeenth century jurist, declared, "Equity varies with the length of the Chancellor's foot." However, as time went on the rules of equity did lose their flexibility and from the 17th Century onwards equity was rapidly consolidated into a system of precedents much like its cousin Common Law. Charles Dickens' Bleak House parodied the excessive time and expense associated with the Court of Equity in 19th century England.

United States

In the U.S. today, the federal courts and most state courts have combined law and equity in the same courts, so a plaintiff can get legal and equitable relief in one proceeding. This reflects the position in England where the fusion of law and equity was substantially effected by the Judicature Acts 1873–1875. Equity courts were widely distrusted in the northeastern U.S. following the American Revolution, and the northern states eliminated their equity courts by the late 1700s. However, the mid-Atlantic and southern states were slower to abandon their equity courts. The federal courts did not abandon the old law/equity separation until the promulgation of the Federal Rules of Civil Procedure in 1938. Even today, several states still have separate courts for law and equity. Delaware is one notable example, as its Court of Chancery is where most cases involving Delaware corporations are decided. Some other states have separate divisions for legal and equitable matters in a single court. Besides corporate law, which developed out of the law of trusts, areas traditionally handled by chancery courts included wills and probate, adoptions and guardianships, and marriage and divorce. After U.S. courts merged law and equity, American law courts adopted many of the procedures of equity courts. The procedures in a court of equity were much more flexible than the courts at common law. In American practice, certain devices such as joinder, counterclaim, cross-claim and interpleader originated in the courts of equity. Also, the modern class action evolved out of joinder.

External link

- [http://courts.state.de.us/Courts/Court%20of%20Chancery/ Delaware Court of Chancery: Official site] Category:Equity Category:Common law Category:Core issues in ethics

European Investment Bank

The European Investment Bank (the Banque Européenne d'Investissement) is the European Union's financing institution and was established under the Treaty of Rome (1957) to provide financing for capital investment furthering European Union policy objectives, in particular regional development, Trans-European Networks of transport, telecommunications and energy, research, development and innovation, environmental improvement and protection, health and education. Outside the Union, the EIB contributes to European development co-operation policy in accordance with the terms and conditions laid down in the various agreements linking the Union to some 130 countries in Central, South and Eastern Europe, the Mediterranean region, Africa, Asia, Latin America, the Caribbean and the Pacific. The task of the European Investment Bank, the European Union's financing institution, is to contribute towards the integration, balanced development and economic and social cohesion of the Member States. To this end, it raises on the markets substantial volumes of funds which it directs on the most favourable terms towards financing capital projects according with the objectives of the Union. Outside the Union the EIB implements the financial components of agreements concluded under European development aid and cooperation policies. The headquarters is situated in Boulevard Konrad Adenauer in Kirchberg, Luxembourg. The building's first phase was designed by British architect Sir Denys Lasdun and is one of his few works outside the UK.

External link

- [http://www.eib.org/ Welcome to the European Investment Bank] Category:Banks of the EU Category:Supranational banks

Government bonds

A government bond is a bond issued by a national government denominated in the country's own currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds.

Risk

Government bonds are usually referred to as risk-free bonds, because the government can raise taxes or simply print more money to redeem the bond at maturity. Some counterexamples do exist where a government has defaulted on its domestic currency debt, such as Russia in 1998, though this is very rare. As an example, in the US, Treasury securities are denominated in US dollars and are the safest US dollar investments. In this instance, the term risk-free means free of credit risk. However, other risks still exist: such as currency risk for foreign investors (for example non-US investors of US Treasuries would have received lower returns in 2004 because the value of the US dollar declined against most other currencies). Secondly, there is inflation risk - in that the principal repaid at maturity will have less purchasing power than anticipated if the inflation outturn is higher than expected. Many governemnts issue inflation-indexed bonds, which protect investors against inflation risk.

Issuance

Government bonds are issued through agencies that are part of the government's treasury department, for example
- Bunds are bonds issued by the German Finance Agency, denominated in euros
- Gilts are bonds issued by the UK Debt Management Office and are denominated in sterling
- US Treasuries are issued by the Bureau of the Public Debt

Asia

(AA-/A2)

Issued By: Ministry of Finance (MoF)
- Japanese Government Bonds (JGBs)
- Revenue Bonds/Straight Bonds
- Financing Bills
- Subsidy Bonds
- Subscription Bonds
- Contribution Bonds
- Demand Bonds (kofu kokusai) [http://www.mof.go.jp/english/ Ministry of Finance]

Europe

Eurozone

(AAA/Aaa)

Issued By: Agence France Trésor, the French Debt Agency
- OATs
- BTFs - bills
- BTANs - 1 to 6 year notes
- Obligations assimilables du Trésor (OATs) -
- TEC10 OATs - floating rate bonds indexed on constant 10year maturity OAT yields
- OATi - French inflation-indexed bonds
- OAT€i - Eurozone inflation-indexed bonds [http://www.aft.gouv.fr Agence France Trésor]

(AAA/Aaa)

Issued By: Finanzagentur GmbH, the German Finance Agency
- Bunds
- Bubill - bills
- Bundesschatzanweisungen (Schätze) - 2 year notes
- Bundesobligationen (Bobls) - 5 year notes
- Bundesanleihen (Bunds) - bonds [http://www.deutsche-finanzagentur.de/ Finanzagentur GmbH]

(AA- "with negative outlook"/Aa2)

Issued By: Dipartimento del Tesoro
- BTPs
- Buoni Ordinari del Tesoro (BOTs) - bills up to 1 year
- Certificati del Tesoro Zero Coupon (CTZ) - bills up to 2 year
- Buoni del Tesoro Polianuali (BTPs) - bonds
- Certificati di Credito del Tesoro (CCTs) - floating rate notes
- BTP Indicizzato all'Inflazione - inflation linked bonds [http://www.dt.tesoro.it/ENGLISH-VE/Public-Deb/index.htm Dipartimento del Tesoro]

(AAA/Aaa)

Issued By: UK Debt Management Office
- Gilts
- Conventional Gilts
- Index-linked Gilts
- Double-Dated Gilts
- Undated Gilts
- Gilt Strips [http://www.dmo.gov.uk/ UK Debt Management Office]

North America

(AAA/Aaa)

Issued By: Bureau of the Public Debt
- US Treasuries
- Treasury bill
- Treasury note
- Treasury bond
- TIPS
- Savings bond [http://www.publicdebt.treas.gov/ Bureau of the Public Debt] Category:Bonds ja:国債

Risk-free bond

A risk-free bond is a theoretical bond that repays interest and principal with absolute certainty. In practice, government bonds are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic currency debt. For instance, U.S. Treasury notes and bonds are considered risk-free bonds, even though investors in U.S. Treasury securities do face a negligible amount of credit risk. That this credit risk is not always negligible, is shown by the example of Russia that defaulted on its domestic debt in 1998.

Sovereign bonds

A sovereign bond is a bond issued by a national government denominated in a foreign currency. Bonds issued by national governments in the country's own currency are normally referred to as government bonds. Nations with very high or unpredictable inflation or with unstable exchange rates often find it uneconomic to issue bonds in their own currencies and so are forced to issue bonds denominated in more stable foreign currencies. This raises the issue of default if the nation cannot afford to repurchase the necessary foreign currency at bond repayment time. Due to the risk of default, investors require the bonds to be issued with a higher yield. This makes the debt more expensive to service, increasing risk of default. In the event of default, unlike a corporation or even a municipal subdivision, a nation cannot file for bankruptcy. But on the rare occasions that a default occurs, just as in defaults on corporate bonds, recent practice has been that the defaulting borrower presents an exchange offer to its bond holders in an effort to restructure the sovereign debt, as has been the case in US dollar denominated bonds issued by Peru (1996) and Argentina (2001). However, getting the bond holders to accept an exchange offer has become very difficult, something caused by the holdout problem. During the early 1980s, the sovereign bonds of developing nations were a popular investment for Western banks. These created many problems when some nations found it difficult to repay those bonds.

Municipal bond

In the United States, a municipal bond or "muni" is a bond issued by a state, city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, school districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds are guaranteed by a local government, a subdivision thereof, or a group of local governments, and are assessed for risk and rated accordingly. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued, although municipal bonds issued for certain purposes may not be tax exempt.

Purpose of municipal bonds

Municipal bond issuers

Municipal bonds are issued by states, cities, and counties, or their agencies (the municipal issuer, for the purpose of raising funds. The methods and practices of issuing debt are governed by an extensive system of laws and regulations, which vary by state. Bonds bear interest at either a fixed or variable rate of interest. The issuer of a municipal bond receives a cash payment at the time of issuance in exchange for a promise to repay the investors who provide the cash payment (the bond holder) over time. Repayment periods can be as short as a few months (although this is rare) to 20, 30, or 40 years, or even longer. The issuer typically uses proceeds from a bond sale to pay for projects or for other purposes it cannot or does not desire to pay for immediately with funds on hand. Tax regulations [http://www.fourmilab.ch/ustax/www/t26-A-1-B-III-103.html] governing municipal bonds generally require all money raised by a bond sale to be spent on one-time capital projects within three to five years of issuance (certain expections permit the issuance of bonds to fund other items, including operations and maintenance ongoing expenses, the purchase of single-family and multi-family mortgages, and the funding of student loans, among many other things). Because of the special tax-exempt status of most municipal bonds, investors usually accept lower interest payments than on other types of borrowing (assuming comparable risk). This makes the issuance of bonds an attractive source of financing to many municipal entities, as the borrowing rate available in the open market is frequently lower than what is available through other borrowing channels. Municipal bonds are one of several ways states, cities and counties can issue debt. Other mechanisms include certificates of participation and lease-buyback agreements. While these methods of borrowing differ in legal structure, they are similar to the municipal bonds described in this article.

Municipal bond holders

Municipal bond holders may purchase bonds either directly from the issuer at the time of issuance (on the primary market), or from other bond holders at some time after issuance (on the secondary market). In exchange for an upfront investment of capital, the bond holder receives payments over time composed of interest on the invested principal, and a return of the invested principal itself (see bond). Repayment schedules differ with the type of bond issued; the issuer may make equal amortized interest and principal payments every six months, may make only interest payments until the bond matures and then repay the entire principal amount, make one lump-sum payment at maturity, or some mix of these options. The interest income on a municipal bond may be tax-exempt. This makes municipal bonds an attractive investment to certain investors, and results in investors accepting a lower interest rate on their investment than they would on a taxable investment of equivalent risk.

Characteristics of municipal bonds

Taxability

One of the primary reasons municipal bonds are considered separately from other types of bonds is their special ability to provide tax-exempt income. Interest paid by the issuer to bond holders is often exempt from all federal taxes, as well as state or local taxes depending on the state in which the issuer is located, subject to certain restrictions. Bonds issued for certain purposes are subject to the alternative minimum tax. The type of project or projects that are funded by a bond affects the taxability of income received on the bonds held by bond holders. Bonds funding projects that are constructed for the public good are generally tax free, while bonds issued to fund projects partly or wholly benefiting only private parties may be taxable. The laws governing the taxability of municipal bond income are complex; however, bonds are typically certified by a law firm as either tax-exempt or taxable before they are offered to the market. Purchasers of municipal bonds should be aware that not all municipal bonds are tax-exempt.

Risk

Main article: credit risk The risk ("security") of a municipal bond is a measure of how likely the issuer is to make all payments, on time and in full, as promised in the agreement between the issuer and bond holder (the "bond documents"). Different types of bonds carry different securities, based on the promises made in the bond documents:
- General obligation bonds promise to repay based on the full faith and credit of the issuer; these bonds are typically considered the most secure type of municipal bond, and therefore carry the lowest interest rate.
- Revenue bond promise repayment from a specified stream of future income, such as income generated by a water utility from payments by customers.
- Assessment bonds promise repayment based on property tax assessments of properties located within the issuer's boundaries. In addition, there are several other types of municipal bonds with different promises of security. The probability of repayment as promised is often determined by an independent reviewer, or "rating agency". The three main rating agencies for municipal bonds in the United States are Standard & Poor's, Moody's, and Fitch. These agencies can be hired by the issuer to assign a bond rating, which is valuable information to potential bond holders that helps sell bonds on the primary market.

Comparison to corporate bonds

Because municipal bonds are most often tax-exempt, comparing the coupon rates of municipal bonds to corporate or other taxable bonds can be misleading. Taxes reduce the net income on taxable bonds, meaning that a tax-exempt municipal bond has a higher after-tax yield than a coporate bond with the same coupon rate. This relationship can be demonstrated mathematically, as follows: r_m = r_c ( 1 - t ) where r_m = interest rate of municipal bond r_c = interest rate of comparable corporate bond t = tax rate For example if: r_c = 10% t = 38% then r_m = .10 (1 - .38) = 6.2% A municipal bond that pays 6.2% therefore generates equal interest income after taxes as a corporate bond that pays 10% (assuming all else is equal).

External links

- [http://www.bondbuyer.com/ The Bond Buyer], the daily newspaper of public finance.
- [http://www.investinginbonds.com/ The Bond Market Association], the industry trade group. Category:Bonds Category:Government

Federal Home Loan Mortgage Corporation

The Federal Home Loan Mortgage Corporation ("Freddie Mac") is a stockholder-owned, publicly-traded company chartered by the United States federal government in 1970 to purchase mortgages and related securities, and then issue securities and bonds in financial markets backed by those mortgages in secondary markets. Freddie Mac, like its competitor Fannie Mae is regulated by the Office of Federal Housing Enterprise Oversight (OFHEO) in the United States Department of Housing and Urban Development. Freddie Mac makes money by charging a guarantee fee which is usually a small part of the interest payment of the loans they have securitized into bonds. (For example, Freddie Mac may purchase a loan with a rate of 5.19 percent and put it into a mortgage backed security (MBS) bond which has a 5.0 percent coupon, keeping 0.19 percent as the guarantee fee.) Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for Freddie's guarantee that the principal of the underlying loan will be paid back according to the loan's payment schedule. This is how Freddie Mac began making money at its inception and continues to do so today. But today, the majority of Freddie Mac's income is derived from the interest rate difference in the corporate debt Freddie Mac issues and the MBS that Freddie Mac's retained portfolio purchases. The company is based in McLean, Virginia.

Credit rating

See [http://www.freddiemac.com/investors/credit_reports.html]
- Senior Long-Term Debt: AAA Aaa AAA
- Short-Term Debt A-1+ Prime-1 F-1+
- Subordinated Debt AA- Aa2 AA-
- Preferred Stock AA- Aa3 AA- Watch Negative
- Risk-To-The-Government AA- Not Applicable Not Applicable
- Bank Financial Strength Not Applicable A- Not Applicable

mortgages and loans

Investigations

As of 2004, Freddie Mac is under investigation for creative accounting practices that may have been aimed more at protecting figures than actually managing risk.

Awards

Freddie Mac was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine.

External links

- [http://www.freddiemac.com/ Freddie Mac Home Page]

Data

- [http://biz.yahoo.com/ic/13/13944.html Yahoo! - Freddie Mac Company Profile] Category:Fortune 500 companies Category:Real estate Freddie Mac Category:Companies based in Virginia Category:Companies traded on the New York Stock Exchange

mortgages and loans

Asset Backed Security

Asset-backed securities are a type of bond that is based on pools of assets. Assets are pooled to make otherwise minor and uneconomical investments worthwhile, while also reducing risk by diversifying the underlying assets. The securitization makes these assets available for investment to a broader set of investors. Typically, the securitised assets might be highly illiquid and private in nature. The financial assets in the pool backing the asset-backed securities range from mortgages and credit card debt to accounts receivables. Often the term asset-backed security is used in a narrower sense. As the mortgage-backed security market is so large, it is often seen as separate. In this case, asset-backed security means bonds backed by a pool of financial assets other than mortgages. A significant advantage of asset-backed securities is that they bring together a pool of financial assets that otherwise could not easily be traded in their existing form. By pooling together a large portfolio of these illiquid assets they can be converted into instruments that may be offered and sold freely in the capital markets. According to Thomson Financial League Tables, US issuance (excluding mortgage-backed securities) was:
- 2004: USD 857 billion (1,595 issues)
- 2003: USD 581 billion (1,175 issues)

Government

A government is the body that has the power to make and enforce laws within an organization or group. In its broadest sense, "to govern" means to administer or supervise, whether over an area of land, a set group of people, or a collection of assets. The word government is derived the Greek Κυβερνήτης (kubernites), which means "steersman", "governor", "pilot" or "rudder".

Definitions

One approach is to define government as the decision-making arm of the state, and define the latter on the basis of the control it has over violence and the use of force within its territory. Specifically, the state (and by extension the government) has been considered by some to be the entity that holds a monopoly on the legitimate use of force within a territory. This view has been taken by the political economist Max Weber and subsequent political philosophers. The exact meaning of it depends on what is understood by “legitimate”. If we use the term in an ethical sense, then this definition would suggest that an organisation might be considered a state by its supporters but not by its detractors. An alternative definition is to take "legitimate" violence to be simply that which has active or tacit acceptance by the vast majority of the population. In this view, the presence of insurrection or civil war against an entity would jeopardise its claim to be a state, provided the insurrection enjoyed significant popular support. Similarly, an entity that shared military or police power with independent militias and bandits could be considered to have a monopoly on “legitimate” violence but to be failing to enforce it, reducing its claim to statehood. In practice, such situations are often described as "failed states". Government can also be defined as the political means of creating and enforcing laws; typically via a bureaucratic hierarchy. Under this definition, a purely despotic organization which controls a territory without defining laws would not be considered a government. Another alternative is to define a government as an organisation that attempts to maintain control of a territory, where "control" involves activities such as collecting taxes, controlling entry and exit to the state, preventing encroachment of territory by neighbouring states and preventing the establishment of alternative governments within the country. In Commonwealth English, the word "Government" can also be used to refer only to the executive branch, in this context being a synonym for the word "administration" in American English (e.g. the Blair Government, the Bush Administration). In countries using the Westminster system, the Government (or party in Government) will also usually control the legislature. The French use of the word gouvernement covers both meanings, whereas Canadian French generally uses it to mean the executive branch. The German word Regierung refers only to government as the executive branch; the wider meaning of the word, government as a system, can be translated as Staatsgewalt.

Forms of government

Various forms of government have been implemented. A government in a developed state is likely to have various sub-organisations known as offices, departments, or agencies, which are headed by politically appointed officials, often called ministers or secretaries. Ministers may in theory act as advisors to the head of state, but in practice have a certain amount of direct power in specific areas. In most modern democracies, the elected legislative assembly has the power to dismiss the government, but in those states that have a separate head of government and head of state, the head of state generally has great latitude in appointing a new one.

Theories

There are a wide range of theories about the reasons for establishing governments. The four major ones are briefly described below. Note that they do not always fully oppose each other - it is possible for a person to subscribe to a combination of ideas from two or more of these theories.

Greed and oppression

Many political philosophies that are opposed to the existence of a government (such as Anarchism, and to a lesser extent Marxism), as well as others, emphasize the historical roots of governments - the fact that governments, along with private property, originated from the authority of warlords and petty despots who took, by force, certain patches of land as their own (and began exercising authority over the people living on that land). Thus, it is argued that governments exist to enforce the will of the strong and oppress the weak.

Order and tradition

The various forms of conservatism, by contrast, generally see the government as a positive force that brings order out of chaos, establishes laws to end the "war of all against all", encourages moral virtue while punishing vice, and respects tradition. Sometimes, in this view, the government is seen as something ordained by a higher power, as in the divine right of kings, which human beings have a duty to obey.

Natural rights

Natural rights are the basis for the theory of government shared by most branches of liberalism (including libertarianism). In this view, human beings are born with certain natural rights, and governments are established strictly for the purpose of protecting those rights. What the natural rights actually are is a matter of dispute among liberals; indeed, each branch of liberalism has its own set of rights that it considers to be natural, and these rights are sometimes mutually exclusive with the rights supported by other liberals.

Social contract

One of the most influential theories of government in the past two hundred years has been the social contract, on which modern democracy and most forms of socialism are founded. The social contract theory holds that governments are created by the people in order to provide for collective needs (such as safety from crime) that cannot be properly satisfied using purely individual means. Governments thus exist for the purpose of serving the needs and wishes of the people, and their relationship with the people is clearly stipulated in a "social contract" (a constitution and a set of laws) which both the government and the people must abide by. If a majority is unhappy, it may change the social contract. If a minority is unhappy, it may persuade the majority to change the contract, or it may opt out of it by emigration or secession.

Operations

Governments concern themselves with regulating and administering many areas of human activity, such as trade, education, medicine, entertainment, and war.

Enforcement of power

Governments use a variety of methods to maintain the established order, such as police and military forces, (particularly under despotism, see also police state), making agreements with other states, and maintaining support within the state. Typical methods of maintaining support and legitimacy include providing the infrastructure for administration, justice, transport, communication, social welfare etc., claiming support from deities, providing benefits to elites, holding elections for important posts within the state, limiting the power of the state through laws and constitutions (see also Bill of Rights) and appealing to nationalism. Different political ideologies hold different ideas on what the government should or should not do.

Territory

The modern standard unit of territory is a country. In addition to the meaning used above, the word state can refer either to a government or to its territory. Within a territory, subnational entities may have local governments which do not have the full power of a national government (for example, they will generally lack the authority to declare war or carry out diplomatic negotiations).

Scale of government

Main articles: government ownership, government spending The scale to which government should exist and operate in the world is a matter of debate. Government spending in developed countries varies considerably but generally makes up between about 30% and 70% of their GDP.

Investment

Investment or investing is a term with several closely-related meanings in finance and economics. It refers to the accumulation of some kind of asset in hopes of getting a future return from it. Technically, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').

Types of investment

- In theoretical economics, investment means the purchase (and thus the production) of capital goods - goods which are not consumed but instead used in future production. Examples include building a railroad, or a factory, clearing land, or putting oneself through college. In a stricter sense, investment is also a component of GDP given in the formula GDP = C + I + G + NX. The investment function in that aspect is divided into non-residential investment (such as factories, machinery etc) and residental investment (new houses). Investment is a function of income and interest rates, given by the relation I = (Y, i). An increase in income will encourage higher investment, whereas a higher interest rate will discourage investment as it becomes costlier to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.
- In finance, investment means buying securities or other monetary or paper assets. Valuation is the method for assessing whether a potential investment is worth its price. Types of investments include equity investment or real estate investment, foreign currencies or bonds or postage stamps. These investments may then provide future cash flows and may increase or decrease in value. In the stock markets it is performed by the stock investors.
- Collective investment schemes encourage investors to purchase securities by ma

Bond

Issuers

Issuing bonds

Features of bonds

Types of bond

Trading and valuing bonds

See

Investing in bonds

Arguments against bonds

See also

External links

Math

Debt

Payment

Types of debt

Debt, inflation and the exchange rate

Inflation indexed debt

Debt ratings, risk and cancellation

Risk free interest rate

Ratings and creditworthiness

Cancellation

Effects of debt

Arguments against debt

Levels and flows

See also

External links

Security (finance)

Concept of "security"

Uses of securities

For the issuer

For the holder

Debt and equity

Debt

Equity

Hybrid

Securities markets

Primary and secondary markets

Public offers and private placements

Listing and OTC dealing

International debt markets

Legal nature of securities

Bearer and registered securities

Bearer securities

Registered securities

Divided and undivided securities

Fungible and non-fungible securities

Regulation

See also

Associations

Lists

Market data

Coupon

Loan

See also

Equity

History

Distinction between law and equity

United States

See also

External link

European Investment Bank

See also

External link

Government bonds

Risk

Issuance

See also

Asia

(AA-/A2)

Europe

Eurozone

(AAA/Aaa)

(AAA/Aaa)

(AA- "with negative outlook"/Aa2)

(AAA/Aaa)

North America

(AAA/Aaa)

Risk-free bond

See also

Sovereign bonds