FAQ

FREQUENTLY ASKED QUESTIONS

 

WHAT IS SOVEREIGN DEBT?

Some investors, brokers, registered investment advisors, banks, mutual funds and hedge funds have sought to purchase individual foreign government bonds (or sovereign debt). Sovereign debt usually refers to a national government (sovereign government) issuing bonds or debt in its local currency. Sovereign debt is generally a riskier investment when it comes from an emerging market country and a safer investment when it comes from a developed market country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign debt credit ratings help investors also weigh this risk. In addition, there are several other key bond investment considerations to consider before investing in sovereign debt. They are the bond’s maturity, its redemption features, its credit quality, its interest rate, the price of the bond, its yield and in some case its tax or fiscal status.

 

WHAT ARE FOREIGN BONDS?

Investors can invest in bonds issued by other countries in which they don’t live. Foreign bonds are denominated in the currency of the country in which a non-resident or foreign issuer actually issues the bond. These bonds trade similarly to other bonds in the domestic market in which they are issued. So for example, a Bulldog bond is a pound sterling denominated bond issued in the United Kingdom by a non-United Kingdom issuer. A Yankee bond is a United States dollar denominated bond issued in the United States by a non-US issuer. Rembrandt bonds are issued in the Netherlands; Matador bonds in Spain, Samurai bonds in Japan etc. Do you get the point? If not call me.

In the past the most significant issuance has been the US dollar market however the US dollar market accounts for less than half or about 44% of the global bond market volume.

 

INVESTING IN THE UNITED STATES?

One way to do this is through SBA Pools. What are Small Business Administration (SBA) pools and how do they work?

SBA Pools are modified mortgage pass-through securities that are assembled using the guaranteed portions of SBA 7 (a) loans under the authorities granted to the Small Business Administration by the U. S. Congress through the Secondary Market Improvements Act of 1984.

Some of the characteristic of SBA Pools are:

  • High Credit Quality – SBA Pools are unconditionally guaranteed as to the timely principal and interest payments by the Full Faith and Credit of the United States Government.
  • Rate Sensitivity – Variable Rate SBA Pool coupons adjust at least quarterly and are not typically subject to periodic or lifetime interest rate caps.
  • Marketability- Because SBA Pool coupons reset frequently to the Prime Rate index unhindered by rate caps, their coupons are reflective of the prevailing interest rate environment, greatly enhancing the marketability in various economic conditions.
  • Floating rate debt instruments or floaters pay a coupon rate that varies according to the movement of the underlying benchmark. These types of coupons could, however, be set to be a fixed percentage above, below, or equal to the benchmark itself. Floaters typically follow benchmarks such as the three, six or nine-month T-bill rate or LIBOR.   In other words, if rates move up, so will the coupon on your investment.

 

WHAT DIFFERENT TYPES OF GLOBAL BONDS ARE AVAILABLE?

With the rise of Globalization and multiple types of International debt the global bond market is also complicated by different currencies. Traditionally the United States has dominated the world’s bond market however, now the United States accounts for less than half of the outstanding debt today. The international bond market is comprised of the Eurobond market, the foreign bond market, and the global bond market.

  • The definition of the Eurobond market can be confusing because of its name. Although the euro is the currency used by participating European Union countries, Eurobonds refer neither to the European currency nor to a European bond market. A Eurobond instead refers to any bond that is denominated in a currency other than that of the country in which it is issued. Bonds in the Eurobond market are categorized according to the currency in which they are denominated. As an example, a Eurobond denominated in Japanese yen but issued in the U.S. would be classified as a Euro-yen bond.
  • Foreign bonds are denominated in the currency of the country in which a foreign entity issues the bond. An example of such a bond is the samurai bond, which is a yen-denominated bond issued in Japan by an American company. Other popular foreign bonds include bulldog and Yankee bonds.
  • Global bonds are structured so that they can be offered in both foreign and Eurobond markets. Essentially, global bonds are similar to Eurobonds but can be offered within the country whose currency is used to denominate the bond. As an example, a global bond denominated in yen could be sold to Japan or any other country throughout the Eurobond market.

 

What are Emerging Market Bonds?

Emerging markets are defined as those nations with economies which are developing. Among those considered emerging markets are some countries in Africa, Asia, Latin America, Middle East, Russia, and eastern/southern Europe. Emerging market bonds usually include government (or “sovereign debt”) bonds; sub-sovereign bonds and corporate bonds. Domestic emerging market bonds–those issued within an emerging market country–make up about three-quarters of the amount of debt in the emerging market bond markets but because it can be difficult for a variety of reasons to trade in domestic emerging bonds, emerging market bonds held by foreign investors are usually foreign or external emerging market bonds. The majority of external emerging market bonds are government bonds.

 

Buying Individual Bonds versus Buying Bond Funds?

Individual bonds and bond funds are two very different animals. Understanding how bond funds and individual bonds differ will help you assess which is the best investment option for you. Here are four factors you should consider:

  1. Return of Principal. Unless there is a default, when an individual bond matures or is called, your principal is returned. That is not true with bond funds. Bond funds have no obligation to return your principal. Except for UITs, they have no maturity date. With a bond fund, the value of your investment fluctuates from day to day. While this is also true of individual bonds trading in the secondary market, if the price of a bond declines below par, you always have the option of holding the bond until it matures and collecting the principal.
  2. Income. With most fixed-rate individual bonds, you know exactly how much interest you’ll receive. With bond funds, the interest you receive can fluctuate with changes to the underlying bond portfolio. Another consideration is that many bond funds pay interest monthly opposed to semiannually, as is the case with most individual bonds.
  3. Diversification. With a single purchase, a bond fund provides you with instant diversification at a very low cost. To put together a diversified portfolio of individual bonds, you’ll need to purchase several bonds, and that might cost you $50,000 or more. Most mutual funds only require a minimum investment of a few thousand dollars.
  4. Liquidity. Virtually all bond funds can be sold easily at anytime at the current fund value (NAV). The liquidity of individual bonds, on the other hand, can vary considerably depending on the bond. In addition to taking longer to sell, illiquid bonds may also be more expensive to sell.

 

Comparing Individual Bonds and Bond Funds

(Click Chart to View Full Size)



 

HOW DO I OPEN AN ACCOUNT AND WHERE IS THE PAPERWORK TO DO SO?

For your account to be open promptly and accurately, please provide the information requested on the new account application as outlined in the instructions on the new account forms.  Thank you for your cooperation.

New Account Application

Traditional IRA Adoption Agreement

Trustee Certification of Investment Powers

Account Transfer Form

New Account DVP / RVP Form

 

 

HOW ARE MY ACCOUNTS INSURED?

SIPC (Securities Investor Protection Corporation), insures each customer up to $500,000 maximum. This figure includes a maximum of $250,000 on claims for cash: http://www.sipc.org/

Other asset protection:  http://www.pershing.com/media/Pershing-Protection-of-Client-AssetsFAQs.pdf

 

WHAT DOES DELIVERY VS PAYMENT MEAN?

Many of our clients custody their assets at other brokerage firms, wire houses, and or banks. In these cases we engage in a transaction know in the industry as a Delivery verses Payment (DVP) transaction where we exchange the securities purchased for cash with your choice of custodian on settlement day. A new DVP account application is established and on the clients instructions the custodian will make immediate payment upon delivery of the purchased security. This transaction is also called cash on delivery. The bank usually acting as the client’s agent will accept the securities and upon receipt of the securities will deliver the cash to pay for the purchase simultaneously on settlement day.

The payment may be made by bank wire, check, or direct credit to an account.

If you’re a broker dealer or registered investment advisor we can clear and or deliver trades directly in Euro Clear, Clear Stream and SIS-Sega. In addition we have local market settlement capabilities if necessary to settle even the most difficult transactions.