1. Introduction
Before going into defining the different types of bonuses there are, let's first define what a bond is.
A bond is a financial obligation contracted by the investor; Another definition for a bond is a certificate of debt, that is, a promise of future payment documented on paper and that determines the amount, term, currency and sequence of payments.
When an investor buys a bond, he is lending his money to either a government, a territorial entity, a state agency, a corporation or company, or simply the lender.
In return to this loan, the issuer promises to pay the investor some interest during the life of the bond so that the capital is reinvested at said rate when it reaches maturity or maturity.
Why invest in bonds?
Many of the financial advisers recommend investors to have a diversified portfolio made up of bonds, stocks and funds, among others. Because bonds have a predictable flow of money and the value of the money is known at the end (what they will deliver to the investor at the end of the investment), many people invest in them to preserve capital and increase it or receive income interest, in addition to people who seek to save for the future of their children, their education, to have a new house, to increase the value of their pension or other reasons that have a financial objective, investing in bonds can help you achieve your goals.
Keys to choosing the Bond that best suits you
There are many variables to consider when making the decision to invest in a certain type of bonds: their maturity, contracts, interest payment, credit quality, interest rate, price, yield, tax rates and taxes, etc.
All these points help an investor to determine the type of bond that can meet his expectations and the degree of investment that he wants to obtain according to the objectives sought.
The interest rate:
The interest paid by the bonds can be fixed or variable (linked to an index such as DTF, LIBOR, etc.). The time period for their payment is also different, they can be payable monthly, quarterly, semi-annually or annually, these being the most common forms of payment.
(It should be noted that interest in the vast majority of countries is paid when due, in Colombia there is this method and that of paying interest in advance; the difference between one and the other is that in bonds with past due interest they will deliver the capital plus the interests at the end and in the anticipated modality the interests are paid at the beginning).
Maturation:
The maturity of a bond refers to the date on which the principal or principal will be paid. The maturity of the bonds handles a range from one day to thirty years.
Ripening ranges are often described as follows:
1. Short term: maturation up to five years.
2. Intermediate term: maturation from five years to twelve years.
3. Long term: maturing of twelve years onwards.
Bonds with contracts:
When the maturity of a bond is a good guide to how long the bond will be extraordinary for an investor's portfolio, certain bonds have structures that can substantially change the expected life of the investor. In these contracts, the so-called call provisions can be made, in which they allow the issuer to reimburse certain money to the principal of the investor at a certain date. Call operations for bonds are used when interest rates have fallen dramatically since they were issued (they are also called call risk). Before investing in a bond, ask if there is a call provision, and if there is, make sure you receive the yield to call and the yield to maturity. Bonds with redemption provisions generally have a higher annual return that outweighs the risk of the bond being called early.
On the other hand, put operations allow the investor to demand from the issuer
repurchase the bond on a specified date prior to maturity. This is done by investors when they need liquidity or when interest rates have risen since issuance and reinvest at higher rates.
Credit quality:
It refers to the investment grade of the bonds as well as their investment grade. These ratings range from AAA (which is the highest) to BBB and so on, determining the quality of the issuer.
Price:
The price paid for a bond is based on a set of variables, including interest rates, supply and demand, credit quality, maturity, and taxes. Newly issued bonds are generally traded at a price very close to their face value (at which they went on the market). Bonds in the secondary market fluctuate with respect to changes in interest rates (remember that the relationship between price and rates is inverse).
Yield:
The yield rate is the rate of return that is obtained from the bond based on the price that was paid and the interest payment received. There are basically two types of yield for bonds: ordinary yield and maturity yield.
The ordinary yield is the annual return of the money paid for the bond and is obtained by dividing the payment of interest on the bond and its purchase price. If, for example, you bought a bond at $ 1,000 and the interest is 8% ($ 80), the ordinary yield will be 8% ($ 80 / $ 1,000); Let's look at another example, if you bought a bond at $ 900 and the interest rate is 8% ($ 80) then the ordinary yield will be 8.89% ($ 80 / $ 900).
The maturity yield, which is more significant, is the total return obtained by holding the bond until it matures. allows you to compare bonds with different coupons and maturities and matches all the interest received from the purchase plus the profits or losses.
Tax rates and taxes.
Some bonds have more tax advantages than others, some are tax-free and some do not. A financial advisor can show you the benefits of each bond, as well as the existing regulations for each case.
The relationship between interest rates and inflation
As an investor, you must understand how bond prices are directly connected to business cycles and inflation. As a general rule of thumb, the bond market and the economy in general benefit from continuous and sustainable growth rates. But it must be taken into account that this growth could lead to increases in inflation, which makes the costs of goods and services more expensive and also leads to a rise in interest rates and affects the value of bonds. The rise in interest rates pushes the prices of bonds down and that is why the bond market reacts negatively.
How to invest in bonds
There are many ways to invest in bonds. The most common are to buy bonds individually and enter bond funds.
There are a huge number of bonuses to choose from and find the one that meets your expectations and needs. Most of the bonds are traded in the market over the counter or OTC and on each of the world's exchanges.
If you plan to invest in a primary bond, your advisor will explain the steps to take and the risks involved in that bond and its terms and conditions. If you want to buy or sell a bond in the secondary market, many brokers maintain a list of bonds with different characteristics that may interest you.
Each firm charges a commission for trading on the stock market, these commissions are established by each firm and may vary according to the amount of the transaction, the type of bond and the amount of business that one gives to the firm.
Bond funds offer professional portfolio selection and management and allow the investor to diversify the risk of their investment.
These funds do not have a specific maturity date of the investment due to market conditions and the purchase and sale of bonds to establish the portfolio and as a result of these operations the value of the funds will fluctuate daily showing the value of the bonds in the portfolio.
Fundamental strategies for investing in bonds
There are several techniques that as an investor you can take into account to achieve your objectives and meet your goals
Diversification of the portfolio:
Diversification can provide a certain degree of security to your portfolio in the way that if one part of your portfolio is lowering its profitability the other part may be increasing it, maintaining a balance.
Climbing:
This is buying bonds of various maturities. By buying bonds of different maturity, the portfolio's sensitivity to interest rate risks is being reduced.
Barbell
This strategy involves investing in more mature securities to limit the risk of fluctuations in prices. Unlike the scaling strategy, the bonds will have maturities at both ends, long term and short term.
Bond Swap
The sale of one title and the purchase of another, either to change maturity, rate or other objectives within the portfolio.
2. Types of Bonds
There are various types of bonds. These can be differentiated:
to. depending on the issuer
b. depending on the structure
c. depending on the market where they were placed
to. Depending on who your issuer is:
- The bonds issued by the national government, which are called sovereign debt. The bonds issued by the provinces or provincial bonds, by municipalities, and by other public entities. And finally there are bonds issued by financial entities and corporate bonds (issued by companies), which is called private debt.
b. Depending on its structure:
- Fixed rate bonds: the interest rate is preset and is the same for the entire life of the bond Variable rate bonds (floating rate): the interest rate paid on each coupon is different since it is indexed in relation to a rate of reference interest such as Libor. They can also be bonds indexed to a specific financial asset (for example, a US bond). Zero coupon bonds: there are no periodic payments, so the principal is paid at maturity and they do not pay interest. They are sold at a discount rate. Bonds with built-in options: These are bonds that include special options such as: Redeemable bonds (»callable»): Includes the option for the issuer to request the repurchase of the bond on a certain date and at a certain price.Some bonds may be redeemable if the macroeconomic / tax conditions in which they were issued change, therefore the issuer can buy them back at an established price. Bonds with put option: Includes the option for the investor to sell the bond to the issuer on a specified date and prices. Exchangeable bonds: These bonds are an intermediate product between stocks and bonds. They are an amphibious product because they live two lives, one in fixed income and another if desired in equities. The company launches a bond issue with a fixed yield, and establishes the possibility of converting the money from these bonds into shares. These exchanges are usually discounted from the price of the shares on the market. Unlike convertible bonds, in exchangeable bonds the bonds are exchanged for old stocks,that is, already in circulation and with all the economic rights. Convertible bonds: They are identical to the exchangeable ones, except that in this case the company delivers shares. It is a bond plus an option that allows the holder to exchange it for shares of the issuing company on a specified date and price. There are also sovereign bonds that are convertible into other bonds. Convertible bonds: bonds with warrants: It is a bond plus an option to buy a certain amount of new shares at a given price. There are also sovereign bonds that have warrants for which you can buy another bond. Bonds with guarantees: these are bonds that have some type of guarantee on the principal and / or interest. The guarantee can be:Except that in this case the company delivers shares. It is a bond plus an option that allows the holder to exchange it for shares of the issuing company on a specific date and price. There are also sovereign bonds that are convertible into other bonds. Convertible bonds: bonds with warrants: It is a bond plus an option to buy a certain amount of new shares at a given price. There are also sovereign bonds that have warrants for which you can buy another bond. Bonds with guarantees: these are bonds that have some type of guarantee on the principal and / or interest. The guarantee can be:Except that in this case the company delivers shares. It is a bond plus an option that allows the holder to exchange it for shares of the issuing company on a specific date and price. There are also sovereign bonds that are convertible into other bonds. Convertible bonds: bonds with warrants: It is a bond plus an option to buy a certain amount of new shares at a given price. There are also sovereign bonds that have warrants for which you can buy another bond. Bonds with guarantees: these are bonds that have some type of guarantee on the principal and / or interest. The guarantee can be:It is a bond plus an option to buy a certain number of new shares at a given price. There are also sovereign bonds that have warrants for which you can buy another bond. Bonds with guarantees: these are bonds that have some type of guarantee on the principal and / or interest. The guarantee can be:It is a bond plus an option to buy a certain number of new shares at a given price. There are also sovereign bonds that have warrants for which you can buy another bond. Bonds with guarantees: these are bonds that have some type of guarantee on the principal and / or interest. The guarantee can be:
A sovereign bond from a country with minimal risk (such as the Brady Par and Discount Bonds that have US Treasury bonds as collateral)
Some international organization (ex: World Bank)
Mortgage guarantee: it is a bond whose repayment is guaranteed by a portfolio of mortgage loans
Other types of guarantee: exports, garments, assets.
- Corporate bonds: These are the bonds issued by companies Book-entry bonds: They are those bonds in which they do not have physical sheets, but exist only as records of a specialized entity, which is in charge of the different payments. In any case, although the sheet (and therefore the coupons) do not physically exist, the word "coupons" is also used to define the different payments made by the bond.
c. Finally, the bonds differ depending on where the bonds were sold:
- International market: they are bonds issued in a specific currency but placed outside the issuing country. There are Eurobonds, there are also Samurai bonds (it is a security issued in yen and placed in Japan by an institution not resident in that country), and Yankees bonds (it is a debt security in dollars placed in the USA by a non-resident entity in that country). country) Stock bonds: This is a new product in Spain. With these bonds the investor bets on the rise in the stock market or in a specific sector. With these bonds the investor cannot lose money, his capital is guaranteed; if the stock market goes up you will win, but if it goes down you do not lose money. This is achieved with the combination of fixed income and derivatives. Matador bonds: These bonds are issued by supranational organizations or multinational companies. They are bonds for the foreign investor,and they are called matador, bullfighter, as a distinctive sign that they are Spanish. These investors to raise money opt for the Spanish currency and its interest rates. It involves diversifying their debt and thus they choose to collect their resources in pesetas. The issuer not only pays the interest but also runs the risk of the fluctuation of the price of the peseta with respect to the currency itself.Samurai Bonds: They are the same as matador bonds but in this case, they are issued in yen. Samurai bonds are yen securities issued in the Japanese financial market by governments or companies of all origins except Japan, and which are placed by a foreign borrower (usually an international bank) among Japanese investors. Securitized bonds: These bonds are a novelty in our country, and currently they are only mortgages, their guarantee is in mortgages.They consist of a bank or savings bank converting a series of homogeneous mortgage loans into a bond issue. In this way, the mortgage borrower is paying the interest of the bondholders as well as returning the invested capital. These bonds are well known in the United States where disintermediation between banks and savings banks is very frequent.
Junk bonds
Low-rated bonds are formally referred to as high-yield, but are less piously known in global financial jargon as "junk bonds." Junk bonds carry that derogatory name because their level of risk exceeds all the limits of a common and current investment. On the other hand, they tend to have a high return, above the market average. That is why the temptation of good profits must be tempered with the ability to face risks that would make anyone's hair stand on end.
These are basically instruments issued by corporations or countries that, due to the little credit they enjoy among investors, have to pay a very high coupon or interest to become attractive, so that people want to buy them.
Basically, junk bonds are securities that have received a low rating from risk rating agencies ("BB" or lower) and do not reach the category of "investment grade" or Investment grade.
More risk, more return
Buying these bonds can be attractive because their yield is much higher than that of their older brothers, but the risk that the company will go under or the country will default on payments is also high.
The companies that fall into this subgroup are the newest and little known, or those that have a bad reputation in terms of credit strength.
There is also a third category: the "fallen angels" or "fallen angels", bonds of companies that saw better times in which they enjoyed investment grade, but now the rating agencies have lowered their note and must pay more money. They have fallen from financial heaven into the junk bin.
"High Performance" sounds better than "garbage"
Of course, rating agencies, such as Moody's and Standard & Poors, for example, are very careful to use the term "junk bond", whose pejorative connotation is not lost on anyone. As we said, officially there is talk of "high yield" bonds.
Much of the debt of emerging countries also falls into that category: to finance themselves, countries issue bonds. If they are countries with a low degree of financial reliability, as is the case with the vast majority of those in Latin America, these bonds must pay a higher rate.
Country risk hits companies
In the case of countries it is worse, because the so-called «country risk» splashes across their companies. In other words, if a firm from a Latin American country wants to fund abroad and issues bonds, those bonds will have the same ceiling rating as the country. In other words: if a very solid company was created in Venezuela and Moody's scored BB or lower for the country rating, your company can never have a better score than that and you will also have to pay dearly for the money, regardless of the good level management you may have.
Yankees Bonds
They are issued by governments and generally registered on the New York Stock Exchange and on some exchanges in Europe and Asia (Global Issuance). All issues are regulated by the Securities and Exchange Commission in the United States. Yankee Bonds are issued under North American law to be distributed among investors with operations in that country. In turn, a global issue complies with the laws of the countries in which they were registered to be negotiated. The denomination of these titles is in dollars, they do not have intermediate repayments, which is equivalent to a single payment of the capital at the maturity of the title. Some have a PUT purchase option.
Interest is a fixed rate, some through coupons payable semester past due and others year past due. The administrator of these titles in Colombia is the Ministry of Finance.
These issues have a BBB rating, granted by the DUFF & PHELPS. BBB is among the investment grade ratings and indicates an acceptable ability to repay principal and interest. Another feature is that they will not be redeemable before expiration, except those with a PUT purchase option. The bonds are bearer titles, freely negotiable and their ownership is transferable by delivery of the title.
Tax exemptions for these titles appear in article 218 of the tax statute.
3. US Bonds
Corporate Bonds.
They are debt obligations issued by public or private corporations. They are usually issued in multiples of US $ 1000 and / or US $ 5000. The interests are with semi-annual payments and also these interests are taxed.
The Corporate Bonds market is large and liquid; around US $ 10 billion are traded per day. The total market value of these bonds in 1999 was approximately US $ 3 million and the issuances of US $ 677 billion.
Source: Thomson Financial Securities Data
There are actually two markets to buy and sell Corporate Bonds. One is the NEW YORK STOCK EXCHANGE, and the other is the over the counter market where the largest volume of these bonds is traded.
Investors in corporate bonds include large institutions, such as pension funds, foundations, mutual funds, insurance companies, banks, etc.
The benefits of investing in Corporate Bonds.
Attractive Yield.
Corporate bonds generally offer a higher yield compared to government bonds, but this yield is also accompanied by higher risks.
Secure income.
People who want fixed income from their investments while preserving their capital, include these bonds in their portfolio.
Security.
These bonds are highly rated.
Diversity.
Corporate bonds give the opportunity to choose between many sectors, structures and credit qualities, which help to achieve the investment goals set.
Liquidity.
If you need to sell a bond before maturity it is easy to do because of the size of the market and its liquidity.
Types of issuers
The main issuers of these bonds are:
1. Public services
2. Transport companies
3. Industrial companies
4. Financial services companies
5. Clusters
Corporate Bonds are generally divided into:
Short term: maturation between 1 to 4 years.
Medium term: maturing between 5 and 12 years.
Long term: maturing from 12 years onwards.
Like all bonds, these bonds tend to increase in value when interest rates fall, and fall when interest rates rise.
Bond Funds
Some investors who want to reap a good income from corporate bonds buy shares in a mutual fund instead of an individual bond. They do this in order to diversify their investment, seek professional portfolio management, minimal investment and reinvestment of returns.
The managers of these funds diversify the risk of these funds with various issuers, of different ratings, coupons, maturities, etc.
Municipal Bonds.
They are debt obligations issued by states, cities, countries and other government entities to raise money in order to carry out social works and projects. All municipal Bonds offer income exempt from federal and state taxes. For this exemption are very popular when investing include other benefits.
Municipal Bonds benefits.
Free income from federal and state fees.
High degree of security with payment of interest and repayment of capital
Predictable income range of alternatives that accommodate the objectives of each investor.
Liquidity in case of selling before maturity.
Municipal Bonds Security
The issuers of these bonds have a formidable track record with respect to paying their obligations, they also enjoy an excellent rating (generally BBB) and are considered investment grade.
Special Presentations
Municipal Bonds insured.
This is to reduce the risk of the investment. In the event of a default by the issuer, an insurance company guarantees payment of both interest and principal.
Bonds with floating and variable rates.
These become attractive in an environment of rising interest rates.
Bonds with zero coupon, compound interest.
They are issued at a discount from the maturity value and do not have periodic interest payments.
Market risks
When a municipal bond is going to be sold, it is sold at the price they have in the market, which may be higher or lower than the acquisition price. Bond prices change due to fluctuations in interest rates. Thus, when rates fall, new issues will yield lower than older bonds, making them worth more. On the other hand, when rates increase, new issues will have a higher yield than older bonds and these will have a lower value, falling in price.
4. The Spanish public debt market
State debt instruments
The Treasury issues two main types of marketable securities, both recorded as book entries:
Treasury bills: Created in 1987, bills are securities issued at a discount with a face value of 1 million pesetas, with maturities of 3, 6 and 12 months. However, only 12-month bills are issued regularly through auctions - on alternate Wednesdays - according to a pre-established schedule.
Government Bonds and Obligations: the Bonds and Obligations are securities with fixed interest, with a single maturity of 3, 5, 10 and 15 years and with a nominal value of 10,000 pesetas. Its only differential element is the life span. The Bonds are issued for 3 and 5 years, while the Obligations are issued for 10 and 15 years. Coupons are annual. They are issued through competitive auctions that take place monthly, on the first Tuesday of each month (3- and 10-year Bonds) and the following Wednesday (5- and 15-year Bonds).
OUTSTANDING DEBT AT THE END OF EACH PERIOD
(mm. ptas.)
| YEAR | LETTERS | Bonuses | OTHERS | CURRENCY DEBT | BANK OF SPAIN* | TOTAL |
| 1992 | 9536 | 8016 | 1452 | 1575 | 921 | 21500 |
| 1993 | 9700 | 14331 | 1434 | 2423 | -1284 | 26606 |
| 1994 | 11642 | 15728 | 1857 | 2862 | -25 | 32064 |
| nineteen ninety five | 11748 | 19405 | 2503 | 3223 | -278 | 36601 |
* Includes the net balance of assets and liabilities of the Central State vis-à-vis the Bank of Spain
Issuance procedure
Auction calendar
All marketable securities are issued through competitive auctions and the Treasury publishes an auction calendar at the beginning of each year. Each issue of Bonds and Obligations is sold in successive auctions to ensure a minimum size of at least 800 mm. ptas.
Participants in the auctions
All investors - residents and non-residents - can participate in the auctions, either by submitting their offers directly to the Bank of Spain, or through a market member. There are no limits on the quantity or number of offers submitted. Market members must submit their offers before 10:30 am. the day of the auction. Offers submitted directly to the Bank of Spain by non-members of the market must be received two days in advance.
Offers can be competitive or non-competitive. The latter are those in which no price is specified and can only reach a maximum amount per petitioner of 25 million pesetas.
Volume to issue
Before the monthly Bonds and Obligations auctions, the Treasury announces an "expected amount to issue" -which is an estimate and not a minimum- and a "maximum issue amount" -which is a strict commitment- for each of the two days of auction; that is, for the 3-year Bond and the 10-year Obligation on Tuesday and for the 5-year Bond and the 15-year Obligation on Wednesday.
On the Thursday of the week before the auctions are held, the Treasury meets with the group of Market Makers to get their opinion on the state of the market and on the two amounts mentioned above. Once the meeting has concluded, internally and without the Creators' knowledge, the Treasury determines, taking into account the opinions expressed at the meeting and the State's financing policy, the "expected amount of issue" and the "maximum amount to issue.". The following day, Friday, and before 10 a.m., the Treasury and the Bank of Spain make known to the entire market, through the usual communication systems -Reuters, Telerate and Knight-Ridder-, the amounts set for Tuesday and for Wednesday.
As a complement to this mechanism, to reduce the possible risks derived from auctions, the Treasury has assumed the commitment not to leave any auction of Bonds and Obligations void.
Auction resolution
The auctions are conducted using a modified Dutch system, such as the one described below.
In view of the requests received and taking into consideration the amounts announced, the General Director of the Treasury decides the marginal price of the auction and the volume to be issued.
If the total volume of requests at the marginal or higher price turns out to be greater than the one that the Treasury wishes to issue or the maximum previously announced, the requests at the marginal price are reduced by pro-rata.
The price to pay for the securities is determined as follows:
First, the weighted average price of the definitively accepted competitive offers is calculated.
Once this is known, all the securities awarded to competitive offers formulated at a price lower than the weighted average price are acquired at the price formulated in the offer. The remaining securities awarded are acquired at the weighted average price.
The Treasury publishes the result of the auction at 11:30 am on the same day via Reuters (pages KSPT and KSPU), Telerate (page 38494) and Knight-Ridder (page 3275). The Bank of Spain also publishes it via Reuters (pages BANCN, BANCO, BANCS Y BANCT) and Telerate (pages 20656 - 20657 and 20660 - 20661)
Treasury bills are paid and put into circulation two business days after the auction. The Bonds and Obligations of the State are paid and put into circulation on the 15th day of the month in which they are auctioned to facilitate delivery on the settlement date of the futures market.
Trading and deposit of securities
Any natural or legal person, resident or not, can acquire Treasury securities at auctions or on the secondary market. You can sell the securities and withdraw the funds at any time and without any restrictions. For this, it is enough to use the services of an entity authorized to operate in the stock market. This entity can contact any member of the Spanish Debt market. The investor can also place the order directly to a member of the market. The latter will execute the order and, in the case of a purchase, will register the securities with an authorized domestic depository or, through the latter, with Euroclear or Cedel, according to the instructions it receives.
The liquidity of the secondary market is guaranteed by a group of 33 entities that act as specialized members and, in particular, by the twelve most active that hold the status of Market Makers.
BONDS AND STATE OBLIGATIONS: DISTRIBUTION BY HOLDERS
ESTIMATION OF PORTFOLIO TO MATURITY
(% of the total in circulation)
| YEAR | BANK OF SPAIN | BANKS | BOXES | OTHER HOLDERS | OTHER NON-HOLDERS | NON-RESIDENT INVESTORS |
| 1993 | 3.48 | 19.48 | 10.22 | 1.61 | 16.20 | 49.01 |
| 1994 | 3.29 | 25.62 | 19.40 | 2.64 | 23.24 | 25.81 |
| nineteen ninety five | 2.83 | 23.30 | 20.29 | 4.82 | 20.38 | 28.38 |
Market operations
The operations that can be carried out in the Spanish State Debt market can be classified as:
Cash operations: Operations in which the parties agree to settle within 5 business days following the day of the operation.
Forward operations: Operations in which the settlement takes place in a longer period. Among these, it is worth highlighting the operations "for when it is issued" or "When issued market" - gray market -, which normally arises about 15 days before the auction date, when the main characteristics of the issue are announced or confirmed.
Simultaneous (Repos): These are two operations contracted simultaneously and of the opposite sign, purchase and sale, between the same counterparties and for the same nominal amount of the same issue. They can be two cash operations, two forward operations, or one of each, cash and forward.
Repos (Spanish Repos): It is an operation - a single contract- with a repurchase agreement that prevents the initial buyer from selling the securities in any way other than a new sale operation with a repurchase agreement with an expiration date prior to that of the first. Despite being less flexible than the simultaneous one, this figure covers the cases in which the seller seeks greater security in the operation. In addition, the seller ensures to receive the securities on the expiration date of the contract.
Trading systems
The secondary market for government debt is divided into two main segments:
Transactions in the wholesale segment: they are made through one of the following systems:
An electronic network known as the “MEDAS” network, made up of authorized inter-dealer brokers, the so-called “blind brokers”, is configured as the core of the system. Access is limited to specialized members, a total of 33 entities, market makers and applicants for that status. The negotiation is carried out through the screen and without knowing the counterparty. The minimum size of each operation is 100 million pesetas. “Repo” operations are not allowed. Participants must ensure liquidity in the market, quoting buy and sell prices with low spreads. The "spread" is typically 5 to 15 basis points for actively traded issues.
An organized telephone market, in which settlement is carried out through the “money market telephone service”, a special service of the Bank of Spain, constitutes the second level of negotiation. All financial institutions, whether or not they are members of the market, even foreign investors, can have access to this system. Trading can be done with or without the intervention of a broker.
Difference between bid and ask quotes
Among Market Makers; one-month moving average, benchmark benchmark
Transactions in the retail segment: they are carried out bilaterally between financial entities and their clients, taking as a reference the prices and interest rates determined in the wholesale segment.
Treasury securities are also traded on the Stock Exchanges, but the volumes contracted are insignificant compared to the previous segments.
Clearing and settlement system
The Central Account Annotations Center, managed by the Bank of Spain, is responsible for the central registry of property and other rights related to State securities. It is also responsible for the settlement and clearing of the securities between the members of the market. Each member of the market maintains an account in which entries are made concerning their own holdings and, when authorized to do so, another in which they maintain entries on behalf of their clients.
The settlement system ensures delivery against payment for all securities transactions between participants in the clearing and settlement process. When the securities accounts are loaded or credited at the Central, the cash accounts that the members are obliged to keep at the Bank of Spain are simultaneously loaded or credited.
Since March 1989 the Government Bonds are registrable in EUROCLEAR and, since January 1991, in CEDEL.
The domestic cash settlement takes place on the same day or any of the following six days. Currently, the seven-day settlement is normal. Any term date greater than seven days can be negotiated, and there are also standardized negotiation terms.
Tax treatment of treasury securities
Non residents
Since January 1991, foreign investors without permanent establishment in Spain, and who are not residents of any of the 48 tax havens identified by the Ministry of Economy and Finance, are exempt from taxes on both interest and capital gains derived from investments in Treasury securities registered in the Annotations Center. Consequently, if the depository entity is in possession of the supporting documents of the investor's non-resident status, it can obtain from the Bank of Spain the refund of the withholding made on the coupons on the same day of coupon payment.
Japanese Bonds
Japanese bonds (Japanese Government Bonds or JGB) are bonds in yen, they present modalities such as the American market (corporate bonds, municipal bonds, etc.)
Japanese bonds have a few hours allotted for their respective transaction.
5. Terms
Amortization of a Bond:
It corresponds to the total cancellation (only once at maturity) or partial cancellation of the debt (on predetermined dates).
Arbitration:
Two bonds that have the same risks and similar characteristics should be worth the same, that is, the rate of return should be similar. But if, even so, there was a differential in yield, then it would be a possibility of arbitrage, that is, to buy the one that is cheaper and sell the one that is more expensive, anticipating the market correction and winning the difference.
Many times there are arbitrations between bonds with differences in terms or currencies, in those cases the historical differential between said bonds is studied and it is calculated if the deviation has any reason for being or if it is a possibility of arbitration.
Bullet: bonds that pay 100% of the principal at maturity.
Bearish: The market is said to be "bearish" when it has a negative trend. Graphically it is the image of a bear ("bear") pushing down with its claws.
Coupon: is the amount that a bond pays in each period as income and / or amortization. The bonds are made up of one or more coupons that represent the different payments that the bond will make throughout its life.
Yield curve: it is the graph that relates the yields of the bonds with their respective terms (average life)) or sensitivity (duration)
Emerging markets: These are the financial markets of those countries that are developing with incipient financial markets. Emerging markets are considered: Argentina, Brazil, Mexico, Venezuela, Colombia, Costa Rica, Peru, Panama, Ecuador, Guatemala, Jamaica, Russia, Bulgaria, Poland, Croatia, Turkey, Philippines, South Korea, Indonesia, Morocco, Nigeria, Thailand, Vietnam.
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