Certificate, Registered, and Book-Entry: If you bought a muni bond before 1980, you received as proof of ownership an ornate document with coupons attached at the side. This document was known as a "certificate." The certificate did not have your name on it. To collect interest, is was necessary to physically clip the coupons and to send them to the trustee, who would then mail you the interest payment. (That is the origin of the term "coupon.") The certificate functioned like a dollar bill. It was presumed to be owned by the bearer. Those bonds were also known as "bearer bonds."
In the early 1980s, certificates began to be issued with the name of the owner imprinted on the certificate. These are called "registered" bonds. Interest payments are sent automatically to the owner of record.
With the spread of computerization, the process has become even more automated. Many bonds are now issued in "book-entry" form. No certificates are issued. Instead, when you buy a bond, you receive a confirmation statement with a number on it. That number is stored in a computer data bank and is the only proof of ownership. Coupon payments are wired automatically to the checking or bank account that the owner designates. Notification of calls is automatic.
Most bonds are now issued in book-entry form. Older bonds are still available in bearer form, but the supply is diminishing as these bonds mature.
You may hold certificates in your own possession or leave them in an account with a broker. Brokers always prefer holding the certificates. There are two good reasons for letting them to do so. First, if the firm is covered by the Securities Investor Protection Corporation (SIPC), and most are, the bond is protected against loss—that is, against physical loss of the certificate—not against a decline in price due to market conditions. Second, the firm is more likely than you to be immediately aware of calls. If a bond is called, the firm should immediately redeem the bonds. That should protect you against loss of interest.
Leaving a bond in a brokerage account does not prevent you from selling the bond through a different broker. To transfer a book-entry bond, you need only to notify your broker to transfer it by wire to any other firm.
If your bond is in certificate form, however, the matter becomes more complicated because you need to deliver the certificate within three days after the sale. And six weeks or more may be needed to obtain the document because it is usually not stored in the branch office. Selling through the firm holding your bond eliminates actually having to get your hands on the document, and permits you to sell at any time. If you want to sell through a different broker, then you must allow time to obtain the certificate.
Basis Points: Interest rates rise from 6% to 7%. How much have they gone up?
No, they have not gone up 1%. On a percentage basis, that increase represents a percentage difference of 16.7%. This may seem like nitpicking. But suppose, for example, that interest rates rise from 6% to 6.12%? How would you label that increase using percentages?
The answer to that question would be either imprecise or confusing. Since institutional investors make or lose thousands of dollars on seemingly minute percentage changes, they have divided each percentage point into 100 points, each of which is called a "basis point" (bp). The difference between an interest rate of 6% and one of 7% is 100 basis points; between 5% and 6%, it is still 100 basis points. An increase in interest rate yield from 6% to 6.12% represents an increase in yield of 12 basis points (which would be recorded as 12bp).
The term "basis point" is used to compare both price and yield. If, for example, you are comparing two different bonds, you might note that the three-year bond yields 6.58%, whereas the two-year bond yields 6.50%. In this instance, the three-year bond yields 8 basis points more than the two-year bond. Changes in interest rates from one day to the next, or from one year to the next, are denoted in basis points.
Under normal circumstances, yields of most bonds vary from day to day by no more than a few basis points. But occasionally moves are higher. A rise or a decline in yield from one day to the next of more than 10 basis points constitutes a major price move and therefore a major change in the direction of interest rates. Remember that changes in yield translate into changes in price and vice-versa.
Experienced investors and salespeople think in basis points. It is far easier and more precise than using percentages. Using the term will immediately mark you as a knowledgeable investor.
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