Tracking Debt Securities Flashcards

Study Notes

TRACE (Trade Reporting and Compliance Engine)

TRACE is a FINRA-approved trade reporting system for corporate bonds in the OTC secondary market.
The system enhances market transparency by promptly disseminating trade details to the public.
Both sides of a transaction must report corporate bond trades occurring in the OTC secondary market.
Municipal securities are excluded from TRACE reporting requirements.
TRACE is not an execution system; it only facilitates trade reporting.

CMO (Collateralized Mortgage Obligation)

Private label CMOs can be issued by investment banks, financial institutions, and home builders.
CMOs may not necessarily use government-issued securities as collateral.
The value of a CMO is derived from the underlying mortgages.
CMOs' unique characteristics prevent direct comparison with other investment types.
Interest-only payments from CMOs are taxed as ordinary income.
Private institutions issuing CMOs are referred to as "private-label" CMOs.
When interest rates fall, CMO tranche payments will increase.

U.S. Dollar and Currency Impact

An increase in the U.S. dollar’s value makes U.S. exports more expensive for foreign markets.
A stronger U.S. dollar leads to cheaper foreign imports for U.S. consumers.
A fall in the dollar causes U.S. goods/services to become less expensive abroad, potentially increasing exports.

Commercial Paper and Brokered CDs

Commercial paper is traded at a zero discount of face value and does not pay periodic interest.
Brokered CD prices fluctuate inversely with interest rate changes.
Rising interest rates on brokered CDs, coupled with limited liquidity, can lead to significant principal losses.

Eurodollars and Eurodollar Bonds

Eurodollar bonds are issued in U.S. dollars outside the U.S., eliminating currency risk for U.S. residents.
The Federal Reserve does not control interest rates for eurodollar deposits.
Eurodollar bonds are in bearer form, pay interest annually, and are exempt from withholding taxes.
Eurodollars are not subject to SEC registration because they are issued outside the U.S.

Federal Funds Rate

The federal funds rate is computed daily, lower than the discount rate, and reflects bank-to-bank lending rates.
The only interest rate directly set by the Federal Reserve is the discount rate.

Currency Exchange and Spot Rates

A decline in the dollar relative to foreign currencies encourages foreign investments in American currency.
Spot rates are quoted for immediate payment and delivery of foreign currencies.
Spot trades settle within 1-2 business days, and forward delivery contracts are also available.

Description

This quiz consists of flashcards designed to help you learn key terms and definitions related to the TRACE trade reporting system for corporate bonds. Each flashcard provides a concise definition to improve your understanding of how TRACE enhances market transparency in the OTC secondary market.