Английский язык. Практический курс для решения бизнес-задач Пусенкова Нина
Debt and Equity
Securities are traditionally divided into debt securities (lesson 30) and equities.
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 is the capital raised by a corporation, through the issuance and sale of shares. A shareholder is any person or organization which owns one or more shares of a corporation’s stock.
In British English, the word stock has another meaning in finance, referring to a bond. It can also be used more widely to refer to all kinds of marketable securities. Where a share of ownership is meant the word share is usually used in British English.
Ownership
The owners of a company may want additional capital to invest in new projects. They may also simply wish to reduce their holding, freeing up capital for their own private use. By selling shares they can sell part or all of the company to many part-owners. The purchase of one share enh2s the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends.
In the common case, where there are thousands of shareholders, it is impractical to have all of them making the daily decisions required in the running of a company. Thus, the shareholders will use their shares as votes in the election of BoD members.
Each share constitutes one vote (except in a cooperative society where every member gets one vote regardless of the number of shares they hold). Effective control rests with the majority shareholder (or shareholders acting in concert).
Shareholder Rights
Although owning 51% of shares means that you own 51% of the company, it does not give you the right to use a company’s building, equipment, or other property. This is because the company is considered a legal person and owns all its assets itself.
Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (most often the shareholders end up with nothing).
Buying
There are various methods of buying and financing stocks. The most common means is through a stock broker. There are many different stock brokers to choose from such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type would be a bank or credit union that may have a deal set up with a broker.
There are other ways of buying stock. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor’s relations departments. Another way to buy stock is through Direct Public Offerings which are sold by the company itself.
Selling
Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high (short selling), if not in that order although a number of reasons may induce an investor to sell at a loss. As with buying a stock, there is a transaction fee for the broker’s efforts in arranging the transfer of stock from a seller to a buyer. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds.
Types of Shares
There are several types of shares, including common stock, preferred stock, treasury stock, and dual class shares. Preferred stock have priority over common stock in the distribution of dividends and assets, and sometime have enhanced voting rights such as the ability to veto M&As or the right of first refusal when new shares are issued. A dual class equity structure has several classes of shares (for example Class A, Class B, and Class C) each with its own advantages and disadvantages. Treasury stock are shares that have been bought back from the public.
Hybrid securities combine 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 enh2ments 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
The securities markets can be divided into the primary markets and the secondary markets. Primary markets comprise new securities sold to their first holders. The issue of new securities is commonly known as an IPO (see lesson 31).
Secondary markets often consist of stock exchanges (see lesson 28). The International Securities Market Association (ISMA) is the trade association for the banks and other investment institutions that are active in the secondary markets.
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.
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. In the absence of computerisation, bearer securities constitute tangible assets. 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.
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 a bundle of intangible rights 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.
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, when such an asset is placed with a custodian, the custodian at the end of the custody arrangement may return assets equivalent to the original asset, rather than the identical asset.
Stock split refers to a corporate action that increases the shares in a public company. The price of the shares are adjusted so that the before and after market capitalization of the company remains the same and dilution does not occur. 2-for-1, 3-for-1, and 3-for-2 splits are the most common but any ratio is possible. Sometimes investors will receive cash payments in lieu of fractional shares.
It is often claimed that stock splits in themselves lead to higher stock prices, however, research does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split.
Source: Wikepidea
Essential Vocabulary
1. mortgage (Mort) n – ипотека, закладная, ипотечный кредит
mortgage v – закладывать
2. repackaging n – «переупаковка» (разделение ценной бумаги на элементы для продажи в качестве самостоятельных финансовых инструментов)
repackage v – «переупаковывать»
3. special purpose vehicle (SPV) – компания специального назначения
4. securitization n – «секьюритизация» (повышение роли различных ценных бумаг как форм заимствования по сравнению с банковскими кредитами; трансформация банковских кредитов в ценные бумаги; стирание различий между рынками банковских кредитов и ценных бумаг)
5. investment bank – инвестиционный банк
6. security interest – право на обеспечение
7. collateral transfer – передача обеспечения
8. marketable security – рыночные (легко реализуемые) ценные бумаги
9. enh2ment n – право на что-либо
enh2 (to) v – давать право на что-либо
10. vote n – голос
vote v – голосовать
voting a – голосующий
11. cooperative society – кооператив
12.majority shareholder – основной акционер
13. legal person – юридическое лицо
14. full service broker – брокер полного профиля
15. discount broker – «дисконтный» брокер
16. investor’s relations department – департамент по отношениям с инвесторами
17. direct public offer – прямое публичное предложение акций
18. short selling – «короткая» продажа
19. trasaction fee – гонорар за операцию
20. capital gains tax – налог на приращение капитала
21. treasury stock – казначейские акции
22. dual class share – «двойная акция»
23. right of first refusal – право первого отказа
24. preference share – привилегированная акция
25. convertible bond – конвертируемая облигация
26. equity warrant – облигационный варрант, дающий право на покупку акций заемщика по оговоренной цене
27. detach v – отделять, отцеплять, разъединять
detachable a – отделяемый, съемный, отрывной
28. International Securities Market Association (ISMA) – Ассоциация международного рынка ценных бумаг
29. bearer security – ценная бумага на предъявителя
30. registered security – именная ценная бумага
31. registrar n – реестродержатель
32. fungible security – взаимозаменяемая ценная бумага
33. non-fungible security – невзаимозаменяемая ценная бумага
34. custodian n – попечитель, финансовый агент, хранитель
custodial a – попечительский
35. stock split – сплит или расщепление акций
36. momentum n – импульс, движущая сила, толчок, темп
Exercise 1. Answer the following questions.
1. How did the term «security» evolve over the years? 2. Who are the usual issuers of securities? 3. What does securitization mean? 4. Why are securities used as collateral? 5. What is equity? 6. What is the relationship between ownership and control in a corporation? 7. What rights do shareholders enjoy? 8. How can shares be bought and sold? 9. What are the most common types of shares? 10. What is the difference between the primary and secondary market? 11. What is the difference between bearer and registered securities? 12. What are the advantages of the stock split?
Exercise 2. You are a strategic consultant hired by a Russian company that wants to create corporate structure similar to the one adopted by the leading Western companies. Using the following briefing materials, you have to explain to the founder of the company what positions should be created in the company.
The Basics of Corporate Structure
In an attempt to create a corporation where stockholders’ interests are looked after, many firms have implemented a two-tier corporate hierarchy. On the first tier is the board of directors: these individuals are elected by the shareholders of the corporation. On the second tier is the upper management: these individuals are hired by the BoD.
Board of Directors
Elected by the shareholders, the BoD is made up of two types of representatives. The first type involves individuals chosen from within the company. This can be a CEO, CFO, manager or any other person who works for the company on a daily basis. The other type of representative is chosen externally and is considered to be independent from the company. The role of the board is to monitor the managers of a corporation, acting as an advocate for stockholders. In essence, the BoD tries to make sure that shareholders’ interests are well served.
Board members can be divided into three categories:
Chairman – Technically the leader of the corporation, the chairman of the board is responsible for running the board smoothly and effectively. His or her duties typically include maintaining strong communication with the chief executive officer and high-level executives, formulating the company’s business strategy, representing management and the board to the general public and shareholders, and maintaining corporate integrity. A chairman is elected from the board of directors.
Inside directors – These directors are responsible for approving high-level budgets prepared by upper management, implementing and monitoring business strategy, and approving core corporate initiatives and projects. Inside directors are either shareholders or high-level management from within the company. Inside directors help provide internal perspectives for other board members. These individuals are also referred to as executive directors if they are part of company’s management team.
Outside directors. While having the same responsibilities as the inside directors in determining strategic direction and corporate policy, outside directors are different in that they are not directly part of the management team. The purpose of having outside directors is to provide unbiased and impartial perspectives on issues brought to the board.
Management team
As the other tier of the company, the management team is directly responsible for the day-to-day operations (and profitability) of the company.
Chief Executive Officer (CEO): As the top manager, the CEO is typically responsible for the entire operations of the corporation and reports directly to the chairman and Board of Directors. It is the CEO’s responsibility to implement board decisions and initiatives and to maintain the smooth operation of the firm, with the assistance of senior management. Often, the CEO will also be designated as the company’s president and therefore also be one of the inside directors on the BoD.
Chief Operations Officer (COO): Responsible for the corporation’s operations, the COO looks after issues related to marketing, sales, production and personnel. More hands-on than the CEO, the COO looks after day-to-day activities while providing feedback to the CEO. The COO is often referred to as a senior vice president.
Chief Finance Officer (CFO): Also reporting directly to the CEO, the CFO is responsible for analyzing and reviewing financial data, reporting financial performance, preparing budgets and monitoring expenditures and costs. The CFO is required to present this information to the board of directors at regular intervals and provide this information to shareholders and regulatory bodies such as SEC. The CFO routinely checks the corporation’s financial health and integrity.
Source: Investopedia, February 28, 2003
Exercise 3*. Find terms in the text that match definitions given below and make sentences of your own with each term.
1. something given to secure a loan or as a guarantee of performance
2. a party that has physical possession of a financial instrument
3. a market of debt and equity instruments that mature in more than 1 year
4. form of business ownership that is a legal entity on its own and puts stockholders and the Board of Directors in control. Owners have limited liability for its actions
5. the ownership interest in a business remaining after its liabilities are deducted
6. securities that are easily sold
7. an unregistered direct sale of securities by a company to limited institutional investors
8. a security registered in the name of an investor, who is the only party that can collect interest and principal or sell the security
9. securities trading market for previously issued financial instruments in the primary market
10. trading securities in organized exchanges and over the counter markets
11. сompany issued securities used for financing and backed by selected financial assets
12. ownership of a corporation through the purchase of shares
Exercise 4*. Fill in the blanks using terms given below.
Spotlight on American Depository Receipts
Until recently, participation in Russia’s lucrative but…… equity market remained a mystery to the international financial……… open to only the most……. emerging market investors. However, in 1995 the Russian electric……. Mosenergo issued the first Russian……. in conjunction with the Bank of New York, thus beginning a trend which has allowed a number of Russian firms to make their first foray into the American capital markets.
Issuing and Trading ADRs
An American Depository Receipt is issued by an American……. institution, denominated in dollars, and represents one or more shares of a foreign corporate……. which has been deposited with a local……. in the home country of the entity.
In the case of Russia, the ADR is created by the US depository institution and……. to the US purchaser. The…….. proceeds as follows. The purchaser’s broker buys the…….. Russian……. through a licensed Russian broker, and subsequently directs that the stock be deposited with a custodial……. of the ADR issuing bank. The broker…….. the transaction will…….. the USD received from the purchaser into rubles and pay the local broker for the shares. On the day that the shares are……. to the custodian, this institution…….. the depository bank. When notification is received, the ADRs are issued and delivered to the broker initiating the transaction, who in turn delivers the securities to the investor. Thus, one of the depository institution’s most crucial roles is that of stock…….. agent and………
Once an ADR is issued, it can be freely sold to othr investors in the US in an…… transaction…… of an ADR works in a fashion similar to the purchase transaction. The owner’s broker may sell the ADR to another US investor in an intra-market transaction, or may sell the shares in Russia in a……. transaction.
Once again going through the local Russian broker, the US broker sells the shares and then…….. the ADRs to the depository bank. The depository institution……. the ADRs and instructs the custodian to deliver the shares held to the local broker who will arrange for the conversion of rubles into dollars to be returned to the ADR…..
Level 1 ADRs
As the quality of…… information disseminated by Russian firms is rudimentary and confusing, the majority of companies issuing ADRs utilize the Level 1 program, which is the simplest method for a foreign company to gain access to the American capital market.
Level 1 ADRs trade……. and consequently the issuing company is…….. from……. with many of the reporting and……… requirements set forth in the 1934 Securities Exchange Act. This exemption allows the foreign issuer to enjoy the benefits of a…… security while continuing to use the current financial reporting process. To issue a Level 1 ADR, a Russian company must do the following:
File its financial statements (utilizing current reporting methods rather than the……. standards) in English with the……., as well as provide information as requested to appropriate Russian…….. authorities.
…… a standard contract with the issuing depository institution enumerating the rights and responsibilities of each party.
File a……… registration statement with the SEC.
Level 2 and 3 ADRs
Level 2 and 3 ADR programs stipulate that a Russian firm should meet additional reporting requirements for…….. on NASDAQ or other……. The Level 2 program envisages registration under the 1934 Securities Exchange Act, whereas the Level 3 program entails a full public…….. with the concomitant reporting requirements, including three years of financial statements according to US GAAP standards and a…….. process similar to that essential for any US…… offering.
Rule 144A Private Placements
Rule 144A allows Russian firms to…… capital via private……. to…….. institutional buyers (QIBs) while avoiding the high costs and extensive disclosure requirements essential for Level 2 and 3 programs. Once these unregistered securities are placed with…… purchasers, they may not be sold to the public for at least two years, although they may be sold to other qualified buyers.
Benefits of ADRs
The issue of American Depository Receipts has a number of advantages for both Russian…… and the investing public. Via an ADR, a Russian company may gain its first introduction to international capital markets while raising public……. of the firm and reaching a much broader range of investors. An ADR issue will signal to the market that a firm actively seeks out and values Western investors, and is willing to work towards meeting international…….. of financial disclosure. Issue of an ADR can also increase……. for a company’s shares in the domestic market, while positively impacting the domestic share price.
Source: Capital Markets Report
Terms:
GAAP, offering, awareness, listing, surrenders, standards, liquidity, due dilligence, convert, Form 6, exempted, volatile, intra-market, qualified, publicly-traded, placements, OTC, community, SEC, holder, sophisticated, utility, depository, entity, custodian, issued, transaction, underlying, securities, agent, initiating, delivered, notifies, transfer, registrar, cancellation, cross-border, cancels, financial, compliance, disclosure, regulatory, execute, exchanges, public, eligible, issuers, raise, ADRs
Exercise 5. Translate into English.
В Нью-Йорк за $300 миллиардами
Не исключено, что через два года акции «Газпрома» можно будет купить в Нью-Йорке. Как стало известно «Ведомостям», монополия думает пройти листинг на NYSE и выпустить ADR второго уровня. Это приблизит «Газпром» к заветной цели – капитализации в $300 млрд, но вынудит быть откровеннее с инвесторами.
В пятницу к берегу американского штата Мэриленд причалил первый танкер с сжиженным газом (liquefied natural gas) «Газпрома». Вместе с газом монополия хочет привести на американский рынок и свои акции. Об этом на пресс-конференции в Нью-Йорке заявил заместитель председателя правления «Газпрома» Александр Медведев. По его словам, «Газпром» хотел бы вывести свои бумаги на Нью-Йоркскую фондовую биржу (NYSE) в течение двух-трех лет, после либерализации рынка ее акций. «Американский финансовый рынок очень привлекателен, – цитируют топ-менеджера информагентства, – здесь самая большая ликвидность, самый разнообразный состав инвесторов».
Компания может пройти листинг на NYSE, а потом выпускать на той же площадке ADR второго уровня, уточнил менеджер «Газпрома». Он говорит, что от идеи выпустить ADR третьего уровня сразу пришлось отказаться – маловероятно, что правительство согласится на дополнительный выпуск акций. По законам США программы второго уровня предполагают включение АDR в листинг одной из ведущих американских бирж – NYSE, NASDAQ, AMEX. Менеджер «Газпрома» полагает, что на NYSE может обращаться 5—10% акций «Газпрома». Сейчас 4,5% акций компании торгуется в виде ADS на Лондонской бирже. Если «Газпром» пройдет процедуру листинга, он станет седьмой по счету российской компанией, бумаги которой можно купить на NYSE. Сейчас это расписки третьего уровня МТС, «Вимм-Билль-Данна», «ВымпелКома» и «Мечела», а также ADR второго уровня «Ростелекома» и «Татнефти».
«Газпром» отдает себе отчет в том, что за выход на NYSE ему придется откровенничать с американскими регулирующими органами, признает менеджер монополии. Компаниям, продвигающим ADR-2 и ADR-3, приходится вести финансовую отчетность в стандарте US GAAP, а «Газпром» использует международные стандарты отчетности (IAS). К эмитентам, бумаги которых торгуются на NYSE, предъявляются те же требования SEC по регистрации и раскрытию информации, что и к американским корпорациям. Сергей Глазер из инвестфонда Vostok Nafta напоминает, что по ним, в частности, руководитель компании несет личную ответственность за достоверность отчетности вплоть до уголовной. Это обеспечивает высокий уровень доверия инвесторов, но иногда создает трудности самим компаниям. Например, прошлым летом аудиторы из Ernst & Young несколько раз отказывались заверять отчетность «Татнефти» за 2003 г., так как она не соответствовала требованиям NYSE и SEC, и капитализация компании упала на 10%.
Наградой за откровенность «Газпрому» могут стать деньги американских инвесторов, которым их внутренние правила запрещают инвестировать за пределами США. В качестве такого инвестора Глазер приводит крупнейший госфонд США CalPERS, управляющий $180 млрд пенсионеров Калифорнии. Руководитель аналитического отдела «Атона» Стивен Дашевский добавляет, что фонды смогут покупать не только акции, но и облигации и евробонды «Газпрома». Сейчас они не имеют права покупать ADS монополии, которые торгуются на Лондонской фондовой бирже. А «Газпром» поставил перед собой амбициозную цель – по словам финдиректора монополии Владимира Круглова, через 3—5 лет приблизить капитализацию монополии к $300 млрд. В пятницу «Газпром» стоил около $94 млрд.
Менеджер «Газпрома» уверен, что и среди нынешних акционеров найдется много желающих конвертировать бумаги в ADR-2. Он думает, что часть своих акций в ADR второго уровня мог бы конвертировать Deutsche Bank и Объединенная финансовая группа, которая на 40% принадлежит немецкому банку. Под управлением ОФГ сейчас находится около 4% акций монополии, Deutsche Bank контролирует менее 2% акций «Газпрома». Получить комментарии банка и ОФГ не удалось. Vostok Nafta, владеющий 1,16% акций «Газпрома», мог бы конвертировать часть этих бумаг в ADR второго уровня, говорит Глазер.
Источник: Ведомости, 05.09.05
Lesson 30
Fixed Income Securities
Read and translate the text and learn terms from the Essential Vocabulary.
A Stock Buyer’s Guide to Bond Investing
Some Bond Market Basics
As a stockholder, you are a part owner of a business, able to enjoy the unlimited upside potential – or downside risk – associated with a particular company. A bondholder, on the other hand, is a creditor, and bonds are known as debt securities.
When you purchase a bond, you are essentially lending money for a specific period of time, at a fixed rate of interest. Bonds are generally considered a more secure investment than stocks since bondholders have a senior claim to a company’s assets in the event of a corporate restructuring.
Bonds are issued by both the public and private sector. The former includes the U.S. government, as well as state and local municipalities. The latter comprises both privately held and publicly traded corporations. Bonds are a reliable alternative to banks and other lenders who might demand less attractive financing terms than the capital markets are able to provide, such as a higher rate of interest. Ultimately, this cost saving benefits both taxpayers and shareholders by lowering the borrower’s overall expenses.
Bonds are generally known as fixed-income securities since they pay a fixed rate of interest. As a result, falling interest rates make outstanding bonds more attractive, while conversely, rising interest rates cause fixed-income securities to lose principal value. Many investors like bonds because regardless of a bond’s fluctuating price during its lifetime, the principal of the bond is returned at face value when it matures.
Bonds of equal credit quality will generally provide investors with higher rates of return as maturity lengthens, since it is considered riskier to hold longer-dated securities than short-term instruments. Investors are also rewarded with progressively higher rates of return as credit quality declines to compensate for the additional risk.
Callable and Bullet Structures
Callable and bullet structures are common to most fixed-income securities. Bond issuers sell redeemable debt, known as callables, in order to give them the flexibility to purchase – or call – the bonds prior to maturity after a specified date. This makes good economic sense for the issuer in a falling interest rate environment since it then allows them to reissue the same amount of debt at a lower interest rate. However, if and when the securities are called, investors are handed back their original investment in cash and are faced with the less attractive option of reinvesting it in lower-yielding, higher-priced securities. This is known as reinvestment risk.
For investors determined to avoid reinvestment risk, noncallable bullets may be purchased. Bullets are bonds with a fixed maturity date and no call provisions. Though the rate of return on bullets will generally be lower than callable securities, the issuer cannot compel the bondholder to redeem the security prior to maturity.
Governments
The majority of public sector debt is issued by the federal government. The size of the market has rapidly contracted in recent years as the budget surplus continues to bolster buybacks of outstanding securities and promotes the reduction of new supply. Interest paid to holders of Government securities is exempt from state and local taxes.
Treasury Securities
Since the U.S. Treasury Department issues most government securities, bonds in this sector are commonly referred to as Treasuries. Given the remote possibility that the U.S. would ever default on its obligations, Treasuries are considered to be the safest of all fixed-income securities and serve as the benchmark utilized by bond investors .
The four most popular types of fixed-income securities issued by the U.S. Treasury are Bills, Notes, Bonds and TIPS (Treasury Inflation-Protected Securities). Bills have maturities of three months to one year, and are sold at a discount since the interest rate is equal to the difference between the purchase price and the principal amount an investor would receive at maturity (interest basically accrues to face value rather than being directly paid out to investors). Notes pay interest semi-annually and are issued in two-year, five-year and ten-year maturities. Bonds are issued with 30-year maturities and also pay semi-annual interest. TIPS provide bond investors with a hedge against inflation since they pay an interest rate that is periodically adjusted according to changes in the Consumer Price Index (CPI).
U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities)are also a popular government investment. Much like bills, STRIPS are sold at a discount to face value, since the interest accrues to the face value of the security rather than as a semi-annual payment to the bondholder. Unlike bills, though, STRIPS offer investors a wide range of longer-dated maturities to choose from.
Agencies
U.S. federal agencies, which are fully owned by the U.S. government, and Government-Sponsored Enterprises (GSEs), which are privately owned entities created by Congress, together issue debt securities known as Agencies. This implicit connection to the federal branch has led Agency structures to be considered second in quality only to U.S. Government securities. Agencies use the proceeds raised in the capital markets to provide funding for public policy purposes, such as housing, education and farming.
GSEs are the most active issuers in the Agency market. You might be familiar with the two largest shareholder-owned companies: Fannie Mae and Freddie Mac.
Mortgages
Mortgage-backed securities, commonly known as mortgages, are bonds created from mortgage loans. These loans are originated by a variety of financial institutions in order to provide financing for home loans and other real estate. Mortgage lenders typically package, or «pool», these loans and then sell them to mortgage-backed securities issuers. The bonds are generally issued in multiples of $1,000.
At approximately $2.5 trillion in outstanding securities, mortgages are now a major segment of the US bond market. Mortgage bonds generally retain high credit quality since most are either explicitly, or implicitly, backed by the federal government.
Mortgage securities are generally classified as either pass-throughsor Collateralised Mortgage Obligations (CMOs). Pass-throughs basically collect mortgage payments from homeowners and pass this cash flow onto investors. CMOs provide a more predictable payment stream than pass-throughs by creating separate «tranches», designed to meet different investment objectives.
Corporates
Public and private companies issue corporate bonds, commonly known as corporates in order to meet both short– and long-term financing needs. The proceeds from a bond sale are therefore used for a wide variety of purposes, such as for the purchase of new equipment, the funding of general operating expenses or for the financing of a company M&As. Corporates are typically issued in multiples of $1,000, have a maturity range between one and 30 years and pay semi-annual interest. The vast majority of corporate bonds are fully taxable.
Corporate Bond Credit Quality
Credit quality is the most important concern for corporate bond investors. Most corporates are assigned credit ratings by Moody’s and S&P. These ratings classify an issuer as «high-grade» or «high-yield». High-grade bonds are considered fairly conservative investments since these companies are deemed to be in good financial health and are unlikely to have trouble meeting their debt obligation. These bonds are rated from «Aaa» to «Baa» by Moody’s, and from «AAA» to «BBB» by S&P.
High-yield bonds are considered speculative since they are issued by companies with more credit risk. These bonds are rated on a scale from «Ba» to «C» by Moody’s, and from «BB» to «D» by S&P. These bonds pay a higher rate of interest – and have a potentially higher rate of return – than their high-grade counterparts. However, high-yield bonds are only appropriate for risk-tolerant investors.
Municipals
States, cities, counties and towns issue municipal bonds. The proceeds from bond sales are used for the building and maintenance of a variety of public works projects – such as for the construction of schools, roads, hospitals and sport stadiums.
There are two types of municipal securities: General Obligation (GO) and Revenue Bonds. GOs are backed by the full taxing authority of the issuer, while Revenue Bonds are backed by the income generated from the project being financed.
Since municipalities can vary in credit quality, most municipal bonds are assigned a credit rating from either Moody’s or Standard & Poor’s. However, municipal buyers have the luxury of opting for no credit risk. Today, approximately 40% of all new issuance is «insured» by a major municipal bond insurance company. Insured bonds automatically receive the highest «AAA/Aaa» ratings since the insurance company guarantees that if a municipality is not able to meet its debt obligations, it will provide the payments of principal and interest.
Municipals are not taxed by the federal government, and are generally exempt from state and local taxes for residents of the issuing state. Since municipals are exempt from federal income taxes, investors in the 28% tax bracket or above would typically receive better returns with municipal bonds in their taxable accounts than with other higher-yielding, taxable fixed-income securities.
Certificates of Deposit
Certificates of deposit, or CDs, are time deposits issued by a bank, which pay a fixed rate of interest for a specified period of time. Since CDs are FDIC-insured, up to a maximum of $100,000 (per depositor, per financial institution, including principal and interest combined in each insurable legal capacity), credit risk is not a concern. CDs are generally offered in multiples of $1,000, while «Jumbo» CDs are sold in $100,000 denominations. CDs may also contain call provisions. CDs may be purchased directly from a bank or brokerage firm.
Putting It All Together
There is only one way to begin building a bond portfolio that is right for you. In fact, it is no different from the advice that you might receive if you decided to construct a stock portfolio: Start with a plan that works.
The best strategies for bond investors are the laddered portfolio and the diversified portfolio approach. Regardless of the shape of the yield curve, your interest rate outlook or the performance of a particular sector, these two basic strategies will help prepare the proper foundation to meet your specific financial objectives.
In a laddered portfolio, bonds mature in sequence over a period of years. As each security matures, the proceeds are reinvested in the longest maturity «rung» of the ladder. This is a rather conservative approach, but it is widely and successfully employed by individual investors since it minimizes reinvestment and interest rate risk.
You may also construct a diversified portfolio. This method uses a wide variety of bond classes and structures. This approach is designed to garner incremental yield by taking on a variety of risks – many of which tend to cancel out one another over time.
Source: SalomonSmithBarney, 2002, www.citibank.com
Essential Vocabulary
1. upside potential – потенциал роста цены или курса
2. downside risk – риск падения цены или курса
3. bondholder n – владелец облигации
4. public sector – государственный сектор
5. municipality n – муниципалитет
6. privately held company – частная компания
7. fixed-income security – ценная бумага с фиксированным доходом
8. outstanding a – неоплаченный долг; ценные бумаги в обращении
9. face value – номинал
10. callable bond – отзывная облигация
11. bullet n – зд. безотзывная облигация
12. redemption (Red) n – погашение, выкуп
redeem v – погашать
redeemable a – погашаемый
13. buyback n – обратная покупка, выкуп