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Using The TRACE system for Better Bond Investing .

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  1. Using The TRACE systemfor Better Bond Investing. By Marilyn Cohen Envision Capital Management, Inc.

  2. Bond Basics. • Why Bonds? • Offers a wide range of maturities, interest terms and credit ratings – Allowing YOU to balance any portfolio. • Bond investors are creditors of the underlying investment – issuer has an obligation to pay its bond holders first vs. stock holders in case of liquidation. • Returns are more predictable (maturity date) allowing YOU to plan your future financial needs more accurately.

  3. Bond Basics. • Why Bonds (Continued)? • Bond prices and interest rates are inversely related, However YOUR principal amount will be returnedif investment is held till maturity Vs. Stock market where initial investment is not secured. • Bond and Bond mutual fund are very different. With a Bond – you always get your principal at maturity. In a Bond fund – your return is uncertain because the fund value fluctuates. • Introduction of T.R.A.C.E provides intra-day bond trade data to everyone.

  4. What is T.R.A.C.E ? T.R.A.C.E : Trade Reporting And Compliance Engine – The key to successful Individual Bond Investing. • A tool developed by the NASD to facilitate the mandatory reporting of OTC and secondary market eligible securities. • Bond trade details now available to public at: • •

  5. Prior to TRACE. Lack of information. No knowledge of the markups paid to the brokerage firm. Individual investors were often victims of price gouging. No stringent legal limits on brokerage compensation. After TRACE. Price transparency: eliminates the gap between individual and corporate investors. Streamlines reporting requirement. Provides intra-day data vs. end of trade data (e.g. MSRB) – Allows YOU to make better investing decisions. Encourages brokerage firms to charge fair compensation markups to their clients. What does it offer to Bond Trading? Shilpa Verma:

  6. TRACE eligible securities. • All United States dollar denominated debt securities:- • Investment grade debt. • High yield debt of U.S companies and foreign private companies. • Medium term notes. • Convertible debt. • Floating rate notes. • Global bonds issued by U.S. companies and foreign private companies.

  7. Non – Eligible TRACE Securities. • Non-Eligible TRACE securities are: • Non-U.S dollar denominated securities. • Sovereign debt. • Development bank debt. • Mortgage – or asset backed securities. • Collateralized mortgage obligations. • Money market instruments.

  8. Transactions reported to TRACE. • All transactions executed in the OTC corporate bond market and any secondary market transaction of a TRACE eligible security have to be reported through the TRACE system. • Any transaction that is for a security listed and reported to a national security exchange is (e.g. on Nasdaq) is NOT reported on the TRACE system. • Any transaction in which the buyer and seller agree to a trade price significantly lower than the current market price (e..g a gift) is NOT reported to TRACE. • TRACE transactions online data available ONLY till 6.30pm eastern time. • Legal trade time reporting requirements is 15minutes.

  9. What does it offer to the Individual Investor? • Creates a level playing field for all investors. • Allows you to see w/n the bond has traded recently or not. • Allows you to judge w/n you are getting a fair price based on the bond’s most recent transactions. • Allows you to determine whether it is the right time to sell or buy a particular bond. • Allows you to to understand the trading pattern of a particular bond in relation to other bonds with similar credit rating or within the same industry.

  10. How does it change the scene for Brokers? • Educated Investors. • Streamlined reporting procedures leave little room for ambiguity. • Mandatory intra-day reporting reduces probability of pricing the bonds higher than their current market price. • Higher accountability towards their clients.

  11. Highlights: Corporate Bond Market • New Corporate Bond issuance volume declined to $711.0 Billion in 2004 – 7% decrease compared to 2003. Source: - Feb, 2004 Research Quarterly Report

  12. USING T.R.A.C.EFor Corporate Bond Trade • Go to • Click on Bond markets & Prices Corporate market At-A-Glance. • 4 search options: Choose one. • Most active Bonds • By Issuers – Type company name – displays all bonds issued – run calculations for diff. scenarios. • Most recent trades • Bond History – Enter single or multiple CUSIP # for details.

  13. H O M E P A G E

  14. 4 Options: E.g Bond History GM Corp. Bond Enter CUSIP #

  15. This screen provides Summary details of the Bond – Issuer / CUSIP, Coupon, Maturity and the # of Trades. The # of Trades section can be used to see the details of the trade. Before You can see the trades, You will be required to Agree to the Terms and Conditions of the Bond Market Association.

  16. Shows all trades for the bond. Gives you option to view in Graphical format. Allows You to evaluate different scenario’s by changing Yield, Price, Call date etc.

  17. On 4/22/05 the Bond was traded for 97.40 at 3.20 & 100.33 at 3.30 Having this information on hand allows YOU – to be a better judge of buy/sell prices.


  19. Now TRACE allows YOU to see the same information online – decreasing dependency on Brokers/Inv. Firms.

  20. Using T.R.A.C.EFor Municipal Bond Trading • Go to Select Municipal market • 3 Options – Choose One • Bonds traded today – Select State, Sort by • Bonds traded yesterday – Select State, Sort by • Bond History – Enter CUSIP number(s).

  21. Select Municipal Market on Home Page. 3 Options. E.g. Bond History Enter CUSIP #

  22. Gives summary of the requested Bond. Click on # of Trades for further details.

  23. Access to Municipal Bond literature online. Notice How the same bond was traded for 110.61 – Inter dealer & 114.233 – Sale to customer

  24. Beginning of 2001 shows the trend of an INVERTED yield curve – signals possibility of recession. As a Bond investor : It tells you that the interest rates might decrease in the future and hence YOU could lock in the higher interest rates today.

  25. Marilyn Cohen Forbes Columnist Author of the Bond Bible & President of Envision Capital Management, Inc. Fixed Income Money Managers 11755 Wilshire Blvd #1140 Los Angeles CA 90025 800.400.0989