is determined. On theNYSE (remember NASDAQ is not an exchange), the specialist maintains anorderly market, whereas on the futures exchange, price is discovered throughan open outcry market.16) What is the duration of a zero coupon bond?Duration is a measure of the interest rate sensitivity of the payments of abond. Zero coupon bonds differ from conventional bonds in that there are nointerest payments. Zero coupon bonds are issued at a discount and investorsreceive a single par payment at maturity. Since the amount and timing of thiscash flow occurs independent of interest rates, the duration of a zero couponbond is simply equal to its maturity. So a 30-year zero coupon bond has amaturity of 30 years and a duration of 30 years. The duration of a 30-yearconventional bond is substantially less than 30 years.17) What is the delta of an at-the-money option?Delta measures the change in the option value for a unit change in theunderlying security. An at-the-money option refers to an option whose strikeprice currently equals the price of the underlying security. For example, anIBM June 80 call is at the money if IBM stock is trading at exactly $80 pershare. At this price, there is a 50% chance that the stock will move “in themoney” (over $80 per share) and there is a 50 percent chance that the stock
130
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingInterview Questions
will move “out of the money” (under $80 per share), so the delta of the atthe-money option is 0.50.
BrainteasersBrainteasers are especially common at the undergraduate level, whererecruiters have little else than a GPA and school pedigree to separate onecandidate for another. For equity-related positions, it used to be verycommon for people to ask interviewers to calculate 7/16ths or 14/32nds tothree decimals. The reasoning here is that a lot of what happens on the deskis fast paced, and if you buy something at 7/16ths and then strike a deal to sellit at 13/32nds, you’re out 3 cents on whatever volume you’re transacting.Now that the stock market has decimalized, this question is a lot lessprevalent, but you can still expect to be quizzed on your 32nds from the fixedincome side. One word of warning: if you’re not comfortable doing quickarithmetic on your feet, you’re probably not going to last long on a sales andtrading desk.1) What is the expected value of a roll of a dice?Most traders, particularly the options traders, are very fond of askingquestions about dice and playing cards. Pay attention in your statistics class– chances are very good that you’ll have someone ask you a basic probabilityquestion. By the way, the answer to the question is 3½, not 3.2) Make me a price on the 8 serial numbers on a $1 bill.This is a test of your familiarity with expected value. Expected value refersto what you can expect, on average. In this example, you have nine possiblechoices for any one digit. The expected value of any one digit is 5 (1,2,3 and4 are below 5 and 6,7,8,9 are above 5). Therefore for an eight-digit serialnumber, the expected value is: 55555555.3) What is the probability of flipping 3 heads and 1 tail?This is a gambler’s trap. Coin flips are memory-less and there’s just as mucha chance of rolling four heads as there are rolling of rolling two heads and twotails or three heads and one tail, etc. Each outcome has a probability of(0.5)^4 = .0625. Don’t get trapped thinking that there’s more of a chance thatthe fourth flip will be a tail just because the previous three flips were heads.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
131
Exit OptionsCHAPTER 12Most people who get into sales or trading don’t really fully understand whatthey’re really getting into. Many hope to have made enough money by age30 to retire. Unfortunately, the reality is that very few people are goodtraders, and selling to the Fidelities and Capital Groups of the world isbecoming an increasingly difficult business to break into, especially in abusiness where relationships mean everything.Having said that, sales and trading can be an incredibly rewarding career forthe right person. Several practical suggestions – consider joining a firm thathas the flexibility to move you around if you’re willing to move. Of course,this isn’t going to be an option when you blow up one of the firm’s majoraccounts and then ask to be transferred to PCS. Instead, this exit option ispremised on your doing a good job and being profitable, and then maybeasking for the possibility of moving over to the capital markets side of thebusiness because you want to pursue an interest in larger transactions andcloser customer interaction. Several firms are very good at this; others arenot. As mentioned previously, Goldman Sachs has a tremendous reputationfor encouraging movement of its personnel between offices and divisions.In the following sections, we take a look at some of the common options ifyou want to leave sales and trading at a sell-side firm.
Business SchoolThe primary exit option for analysts is to go back to business school. Thisoption is not as automatic is it is within the investment banking analystclasses. Typically, under normal market conditions, trading desks will invitesuccessful analysts to stay on as an associate. This is a strong vote ofconfidence, and most analysts will end up choosing to stay on. However, ifit at this stage in your career you realize that you’re good at what you do butyou want to do something else, this might be a good time to have aconversation with your manager to consider relocating or perhaps tryinganother more interesting product area. Alternatively, if you decide thatyou’ve had enough of the business, then the best thing to do is apply tobusiness school. Of course, if your career is less than successful, you willalready have requested applications for business school.Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
133
Vault Career Guide to Sales & TradingExit Options
The main difference between undergraduate analysts and MBA associates isthat MBAs have a quicker path to promotion and sales/trading responsibility.MBAs fetch coffee for weeks rather than months, and can expect to starttrading fairly soon. If this is not happening, then there is something probablywrong with the firm or with the MBA. The scary thing for MBAs is that oncethey’re on the trading desk, they better be sure that this is what they want todo for the long run. The sales and trading profession offers far fewerlegitimate career exits than other MBA career tracks like consulting. Mostexit options in this business relate to switching firms rather than industries. Itis very likely that in a good market you’ll be able to switch firms, but ifyou’re deeply dissatisfied with sales or trading, this change of scenery isprobably going to get old very quickly.
Debt or Equity Capital MarketsCapital markets professionals work with the investment banking and salesand trading departments to sell debt or equity offerings. Capital marketsprofessionals sit on the trading desk, and therefore work better hours thaninvestment bankers, but somewhat longer hours than the traders who breezeout of the office at 4:01 p.m. A capital markets professional can be calledupon to perform comparable analysis, to help structure a deal, to participatein client meetings and road shows and to advise investment bankers about theprice of a debt or equity offering. This sounds an awful lot like the jobdescription of an investment banker. The primary difference is that capitalmarket professionals have more of a market focus, whereas investmentbankers are more focused on a product group. It is this market and clientfocus that makes a successful trader or sales professional eligible forconsideration in this capacity.
The Buy-SideSell-side traders often pine for the buy-side, where the hours are equally niceand the work is a lot less stressful. Buy-side traders act as intermediariesbetween Wall Street sharks and spectacled portfolio managers. While thebuy-side trader does not have to provide liquidity, he is responsible forexecuting orders on a best efforts basis. Best efforts means that the buy-sidetrader is getting the best possible price for each and every order – essentially,134
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingExit Options
his primary responsibility is to keep the sell-side trader honest. The biggerthe buy-side shop, the bigger the trading staff and the more difficult it is forthe sell-side to make an “honest buck.”Buy-side trading is very different from sell-side trading. The buy-side traderacts as the go-between between the portfolio manager and the salestrader/salesperson. The buy-side trader is also responsible for passing alongtimely market information to the portfolio manager customers that he or sherepresents in the marketplace. To get the job done, the effective buy-sidetrader must have extensive relationships with executing brokers. He mustalso have the trust of his client, the portfolio manager. The best way to thinkof it is to put yourself in their position. As a sell-side trader you’re alwaystrying to nickel-and-dime the buy-side. The buy-sider (often an ex-sell-sider)knows this and is always vigilant for the unscrupulous sell-side.Imagine a portfolio manager that has been trying to sell an illiquid truckingstock for two weeks and all of a sudden large bids start popping up out ofnowhere. The proactive buy-side trader has a conversation with the PM, andpasses along this valuable market information – rather than hit the bidsimmediately, maybe there’s an opportunity to sell this illiquid trucker at ahigher price. The buy-side trader could figure out who is showing the bids,determine the buyer’s appetite and place the shares with another institutionalaccount. This buyer is a “natural buyer,” and it’s the most desirabletransaction from the seller’s perspective, since it is orderly and it minimizesslippage costs.
Hedge FundsAnother attractive venue for successful traders and salespeople is the hedgefund community. Hedge funds operate large pools of capital, but aresubstantially less regulated than the mutual fund industry. Hedge funds offerspecialized investment expertise and are committed to one particular strategy(e.g., convertible arbitrage, risk arbitrage, market-neutral long/short equity,and so on). (See the sidebar on hedge fund strategies on the next page.)Larger hedge funds can allocate pools of capital to several strategies – thesehedge funds are called multi-strategy funds. Although there are a myriad offund strategies that can be pursued, the most common type of hedge fund isthe long/short equity hedge fund.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
135
Vault Career Guide to Sales & TradingExit Options
Good traders can thrive in the hedge fund environment. Hedge funds tend toemphasize speculative short-term profits, and traders with an ability togenerate a consistent profit are in high demand. Salespeople are also in highdemand if they have a developed book of business and contacts that caneventually lead to substantial investments in the hedge fund. Salespeople athedge funds are expected to prospect for new contacts, sell new subscriptioninterests and review portfolio performance with existing customers. Theirimportance, especially in a start-up hedge fund environment cannot beoverstated.The downside to hedge funds is that they’re inherently less stableorganizations, even relative to high-turnover investment banks. Salespeopleand traders at hedge funds accept a great deal of career risk, since theircompensation is substantially tied to their commission runs and tradingrevenues. Hedge fund careers have the volatility of the markets and theirorganizational structures are always in flux. Funds are always being created,unwound, merged or separated, and these changes can produce unexpectedwindfall gains or losses from a career perspective.
Hedge Fund StrategiesLong/short equity strategyThe long/short equity strategy is the most prevalent hedge fundstrategy. Rather than just taking leveraged directional bets on the stockmarket, long/short funds buy and sell stocks based on the belief thatone firm’s stock will outperform another firm’s stock. By buying thestar and shorting the dog, long/short equity funds hedge away themarket risk in the position. Portfolio performance is driven entirely bythe hedge fund manager’s ability to pick stocks. Certain hedge fundsare more short-term trading-oriented than others. The best way tobreak into this industry is to work with a headhunter that specializes inthe hedge fund industry.Other hedge fund strategiesMacro hedge funds take positions on macroeconomic events throughoutthe world. Perhaps the most infamous retired hedge fund operator isGeorge Soros, who gained notoriety when his Quantum hedge fund betbig against the British pound and netted a profit exceeding $1 billion.
136
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingExit Options
Global hedge funds take positions in regions throughout the world,including emerging markets.Long Term Capital Management’sexposure to illiquid Russian bonds led to its demise, and triggered ashort-lived financial crisis. Other hedge funds specialize on long-only,short-only or sector-specific strategies. Event driven hedge funds seekto capitalize on perceived market mispricings related to bankruptcies ormergers.Funds-of-fundsFinally, there is the fund-of-funds organization, which is responsible forallocating capital across a portfolio of hedge fund investments. Fundsof-funds scrutinize individual managers in the same way that atraditional portfolio manager analyzes stocks for potential investment.Funds-of-funds are concerned with the long-term performance record ofthe investment manager, and the style-discipline of the manager whohas received a mandate. For example, a fund-of-funds firm that gave a5 percent allocation to a convertible arbitrage fund will want to insurethat over time, the hedge fund manager is in fact faithfully investing inconvertible arbitrage situations and not straying away from the strategythat he was hired to implement.
Day TradingThis option has lost a lot of its appeal since the technology stock bubble burstin March of 2000. Nevertheless, traders who decide to call it quits with thecustomer-oriented flow trading business are often attracted to day trading.Day traders attempt to capture very short-term profits, and they exploit thebest direct-access trading technology available at a number of different daytrading firms. These firms offer a comprehensive trading platform, and mostalso offer risk capital in exchange for an agreement to trade using the firm’ssoftware package and the related commission dollar stream that you areexpected to generate. Before you try your hand at day trading, be aware ofseveral things. First, this risk capital is not free. Firms will normally taketheir cut out of your profits and they will also require you to cover your lossesin full. What this means is that if you make money, you’re only making afraction of what you generate, but if you lose money, you’re entirelyresponsible for the loss. Several firms have less stringent rules around yourtrading losses, but before you sign on, be sure you know the rules of theVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
137
Vault Career Guide to Sales & TradingExit Options
game, and as with any type of trading, be sure that you’re able to handle thesignificant downside written into this arrangement.The latest iteration at day trading firms is to offer commission rebates to daytraders that are adding liquidity to the marketplace. If your order is addingliquidity to the marketplace (i.e., your order enhances the depth of themarket), the you will be entitled to a rebate on the order if it is executed. Onthe other hand, if your order is taking liquidity out of the market, (i.e., yourorder is reducing the depth of the market), then you will be charged a highercommission rate.
138
CAREERLIBRARY
© 2004 Vault Inc.
SALESTRADICAREAPPENDIXRecommended Reading
Glossary and Industry JargonAbout the Author
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
139
Recommended ReadingThe best thing to do is to immerse yourself in the markets. Say goodbye tothe Today show and hello to CNBC. Read The Wall Street Journal, and ifyou’re really enterprising, you’ll take out a subscription to Investor’sBusiness Daily. Although you can’t sit on a trading desk, there is a ton ofliterature available for you to read. Several books that are worth mentioningare:Stocks for the Long Run by Jeremy Siegel gives a great overview of the stockmarket, and is a must if you’re interested in equity sales and trading.Similarly, Frank Fabozzi’s guide book, Handbook of Fixed Income Securitiesis an essential component for any budding bond trader’s bookshelf. It’s notparticularly easy to read, but you can pick and choose your spots.A great book to read about technical analysis is William O’Neil’s How toMake Money in Stocks, which features the cup and handle chart pattern.Another classic is Sam Weinstein’s Secrets for Profiting in Bull and BearMarkets.Hull’s Options, Futures and Other Derivatives gives a good overview ofderivative products. Among other things, it describes option pricingmethodologies and options and futures payoff diagrams.To help decipher your economics textbook, you should read By the Numbers:A Survival Guide to Economic Indicators by Slifer and Carnes. This book iswritten from the perspective of a consumer of economic statistics, and spendsa lot of time explaining what’s important in economic data from the market’sperspective.Several other books that are recommended for entertainment purposesinclude Liar’s Poker by Michael Lewis, which gives you an insider’sperspective on the culture of greed at Salomon Brothers. Reminiscences of aStock Operator by Edwin Lefevre and The Market Wizards series by JackSchwager provides first hand accounts and interviews with some of the besttraders of our time. Since institutional traders are frequently taking the otherside of a speculator’s trade, each book provides a valuable perspective onhow successful people in the business think and approach the markets.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
141
Glossary and IndustryJargonEquity GlossaryLearning the language of the business is half the battle. What follows is abrief review of some of the most heavily used terms that you’ll hear on anequity sales and trading desk.Agency trading: NASDAQ agency traders execute orders in stocks that thefirm does not maintain a market in “on an agency basis.” Customer tradesexecuted by the firm’s position traders are executed on a principal basis.Black-Scholes option pricing model: Before Fischer Black and MyronScholes blew themselves up at Long Term Capital Management, they sat atopthe pinnacle of modern finance theory, rubbing elbows with Miller andModigliani. Black-Scholes is an options pricing model that prices optionsaccording to the current stock price, the time until option expiration, theoption strike price, the risk-free interest rate, the standard deviation of stockreturns, and the cumulative standard normal distribution.The Black-Scholes model makes several key assumptions:• The stock pays no dividends during the life of the option• European exercise terms (option exercise at expiry only) are used• Efficient markets• No commissions• Constant and known interest rates• Returns are lognormally distributed.Convertible bond: A convertible bond can be exchanged for a pre-specifiedamount of common stock in the issuing firm. The conversion ratio indicatesthe number of shares of common stock that the holder of the convertible hasa claim. The conversion price is derived by dividing the par value divided bythe conversion ratio.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
143
Vault Career Guide to Sales & TradingGlossary and Industry Jargon
Delta hedging: A strategy designed to reduce the risk associated with pricemovements in the underlying security, achieved through offsetting long andshort positions of calls and puts. Delta-hedging strategies can be eitherdynamic or static. A dynamic-hedging strategy involves the portfolio beingrebalanced periodically to maintain a targeted delta. A hedging strategy thatis never rebalanced after the initial hedge is initiated is called static-hedging.ECN: ECNs, or Electronic Crossing Networks are direct-access tradingsystems that bypass broker-dealers. Investors and traders are able to inputtheir orders and have them displayed directly on the NASDAQ or the NYSE.Typically, ECNs charge a much lower per share commission than a fullservice broker dealer.Exchange-traded funds (ETFs): ETFs are a basket of securities designed totrack an index and trade like a single stock. Currently there are more than 100exchange-traded ETFs, and the largest and most liquid ETFs are Spiders(SPY) which track the S&P500, Diamonds (DIA) which track the Dow JonesIndustrial Average and the QQQs, which track the NASDAQ 100.Ex-dividend date: The day a stock trades without the dividend. Technically,on the ex-dividend date, the price of the stock should adjust downward by theamount of the dividend that will be paid out on the payment date.Indication: An indication is an estimated price, not a firm quote. When theNYSE has a buy or sell order imbalance, it publishes an indication, which isan estimated range for the stock’s opening price. This indication oftenattracts buy or sell interest, and the indication is updated to reflect this newinterest, and eventually the stock is opened. On the NASDAQ, every preopening quote is deemed to be an indication.Throughout the trading day, traders may be asked for a quote on a bond or astock. The typical quoting convention is that these prices are “indicationsonly,” and that before a salesperson is able to transact, he must double-checkwith the trader to get a “firm quote” which is a price and quantity that thetrader will honor.Momentum trading: Momentum traders seek to exploit the very short-termmomentum in the market. In its simplest form, momentum traders believethat “the trend is your friend” and will buy stocks that are exploding on theupside and shorting stocks that are breaking down. This type of trading can
144
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingGlossary and Industry Jargon
potentially do well in trending markets, but will tend to do poorly in rangebound markets.P/E ratio: The P/E ratio measures the current price of the security dividedby a full year of earnings. Price is pretty obvious, but there are several thingsyou need to consider with earnings. Forward EPS is the expectation for thenext 12 months of earnings. LTM, (last 12 months) is trailing earnings. Sincemost firms are growing their earnings, Forward P/E ratios will normally belower than trailing P/E ratios.Preferred stock: Preferred stock shares characteristics of both commonstock and debt. Preferred stockholders are entitled to dividends as a specifiedpercentage of par. If these dividends can accrue until they are paid, thepreferred stock issue is called a cumulative preferred stock. If the dividendpayment can be missed, then the preferred stock is called a non-cumulativepreferred stock. Dividend payments on preferred stock are not tax deductibleto the issuing corporation.Program trading: Program trading is a generic term used to describe a typeof trading in securities driven by computer-assisted trading programs. Thesestrategies usually involve the trading of stocks, their corresponding options,and index futures and options. The trading of these securities and indices isbased purely on their price in relation to each other on a predetermined basis,and not on company-specific fundamentals. The most common type ofprogram trading is index arbitrage, which exploits the miniscule pricedifferences between indices and their constituent stocks. According to theNYSE, program trading accounts for about 30 percent of average dailytrading volume.Put/call ratio: The put/call ratio is the number of put options contractstraded in a given day divided by the number of call options contracts tradedthat same day. The put volume divided by the call volume yields the put/callratio. The put/call ratio is used as a contrarian indicator: the greater thenumber of puts that are traded, the more bearish is the market and the morebullish the informed speculator is supposed to become. On the other hand,the greater the number of calls that are traded, the more bullish the market hasbecome and this should correspond to a more bearish stance for the informedspeculator.SelectNet: SelecNet was an automated trading service that allowedbroker/dealers to trade with each other electronically. SelectNet allowedVisit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
145
Vault Career Guide to Sales & TradingGlossary and Industry Jargon
market makers to preference each other and was typically used to executetrades between the bid-ask spread. SelectNet was replaced by SuperSOES.Short interest: Short interest refers to how many shares are sold short in agiven stock. Short interest is normally interpreted as a contrarian indicator.Large short-interest represents future demand (i.e., at some point thesebearish bets need to be covered), and shares that everyone hates and thateveryone has sold short can experience volatile moves to the upside (thinkAmazon). The days-to-cover ratio is the number of shares short divided bythe average daily trading volume. The larger this ratio, the more likely thestock is setting up for a short-squeeze.Small Order Execution System (SOES): SOES was implemented byNASDAQ in 1985 as a response to the 1987 market crash. During the Crash,market makers simply refused to pick up the phone to take customer orders.SOES was originally conceived as a small order execution system thatautomatically executed against a market maker’s display size, therebyreducing the possibility that dealers use and abuse the small investor. It didn’ttake long before a new breed of electronic trader was born: the SOES bandit.SOES bandits used the execution system to scalp profits from dealer spreads.Dealers complained as SOES bandits ate their lunch. The newest version ofSOES, SuperSOES is essentially the next generation in NASDAQ orderexecution. This latest version consolidates SOES and SELECTNET, and issupposed to reduce dual liability and improve trading efficiency.You can read more about the electronic gamesmanship between SOESbandits and NASDAQ market makers in Electronic Day Trading by DavidNassar.SuperDOT: SuperDot (“Designated Order Turnaround”) is a computerizedsystem that can send orders of up to 99,999 shares directly to the NYSEspecialist’s computerized order book. SuperDOT bypasses the floor brokerand currently over 90 percent of the NYSE’s orders and 45 percent of theshares that trade on the NYSE are executed through SuperDOT. SuperDOTis an electronic order delivery system, not an order execution system.Consequently, SuperDOT orders are visible only at the specialist post, and notoff the floor. For this reason, large institutional orders are not sent overSuperDOT – the floor has an instant information advantage over the personwho sent the order.
146
CAREERLIBRARY
© 2004 Vault Inc.
Vault Career Guide to Sales & TradingGlossary and Industry Jargon
Technical analysis: The discipline of studying past price movements topredict future price performance. Traders frequently rely on charts to identifyareas of support and resistance, and certain chart formations, such as thedouble bottom or the head and shoulders top or bottom reversal.Triple witching (hour): An event that occurs four times a year: the 3rdFriday of March, June, September and December. On these days, contractsfor stock index futures, stock index options and stock options all expire on thesame day. Triple witching produces a great deal of volatility, especially inunderlying securities that are at or near at-the-money levels. Investors thatare long at-the-money options have a financial interest in pushing the price ofthe underlying security above the strike price, whereas dealers (who aretypically option sellers) have an interest in keeping the price of the underlyingsecurity below the strike price.VIX (Volatility Index): The VIX measures implied volatility in S&P 100options. This implied volatility can be calculated from the option premiumsand an options pricing formula. The VIX is employed by traders as a tool formeasuring investor fear. High readings (above 50) typically mark periods ofmaximum fear and have pinpointed important market bottoms. Low readings(below 20), while not as accurate and timely as high readings, illustrateinvestor complacency and usually are a waning sign pointing towards markettops.Warrants: A warrant is a derivative security that grants the holder the right(but not the obligation) to purchase stock from the issuer at a specific pricewithin a certain period of time. There are two main differences between awarrant and a call. First, warrants are much longer-dated securities. Warrantsare also issued and guaranteed by the issuer, whereas call options areexchange-traded securities. Warrants are normally issued in conjunction witha debt offering, to make the deal more attractive to prospective bond buyers.This extra privilege granted to bond investors hurts the common shareholderbecause it dilutes the existing shareholder’s interest in the ownershipstructure of the firm.
Visit the Vault Finance Career Channel at http://finance.vault.com — withinsider firm profiles, message boards, the Vault Finance Job Board and more.
CAREERLIBRARY
147
Vault Career Guide to Sales & TradingGlossary and Industry Jargon
Fixed Income GlossaryAs with the equity business, there’s a lot of bond language that needs to belearned. You’ll also need to learn the bond math, some of which is providedhere but you’ll need to find a fixed income reference book, and here againyou can’t go wrong with Frank Fabozzi’s, Handbook of Fixed IncomeSecurities.Barbell: A bond trading strategy with which the trader holds long-term andshort-term bonds. In this case, the trader is anticipating a profit based on theview that long and short-term bonds will outperform intermediate-termbonds.Bond equivalent yield: Doubling the semiannual yield.Bond rating agencies: The main bond rating agencies are Standard & Poor’sand Moody’s. The role of the rating agencies is to provide an unbiasedopinion of the issuer’s credit-worthiness. Arguably, this analysis is moreobjective than equity analysis, since the sole criteria that is applied is theability of the issuer to repay its debts. Other secondary bond rating agenciesinclude Fitch’s and Duff & Phelps.Bond ratings: Bonds are classified into two groups – “investment grade”bonds and “junk” bonds. Investment grade bonds include those assigned tothe top four quality categories by either Standard & Poor’s (AAA, AA, A,