Stand By Letters of Credit (SBLC’s)

Value
conversion depends on many factors, some fixed, some floating such as:

• Type of Letter of Credit varies and includes
  (SBLC, ILC, LC, Pay Order, etc.)


• It is Usually viewed as a SBLC is the
  Better Bank Instrument


• SBLCs are issued on a Bank-to-Bank Basis
  only


• The Issuing Bank Rating as well as location
  (branch) of Bank


• Who is issuing the instrument - individual,
  company, government, etc.


• Instrument Must Be in US Dollars only


• Bank Policy


• Market Conditions


• Client Anticipation of Return


• Place Transaction Occurs
  
  

What is done with ‘Cash’ after conversion
- this is becoming a paramount issue with banks converting the instrument,
the preferred and acceptable method is to deposit a portion of the redeemed
funds with the honoring bank, usually not less than 20% for a period of
not less than six (6) months.

Hints   

• These types of Bank Instruments can be
  issued to individuals, corporations, trust, pension funds, endowments,
  non profit organizations, or to any payable entity.


• Individuals who hold such an instrument
  may have problems with 3rd party transactions or banks.


• LC, ILC, or SBLC are often times issued
  for the sale and purchase of tangible assets.


• It is often easier to raise a 'Credit
  Line' than convert the instrument to CASH!


• Fluctuating World Market Conditions set
  the pace and determine the trading value, if any.


• Usually most every instrument can be converted,
  however, some are just Not desirable Trading Instruments on the current
  World Market.


• Certain Required "Documentation'
  is needed for this type of transaction.

U.S. Certificate of Deposits (CD’s)

Certificate of Deposits (CD’s) - outside
of USA, these are usually referred to

as ‘Fixed Deposits’ - Raise a ‘Credit Line’ against them or ‘Cash’ them
out right.

The
'Value Conversion' depends on many factors, some fixed, some floating
such as

• Type of CD (time, maturity date, ownership,
  value, etc.)


• Issuing Bank Rating as well as location
  (branch) of  U.S. Bank


• Physical Location of the Original CD
  - Safety Deposit Box, Corporate Office Safe, Home, etc.


• If an Agent, Security House, or Third
  Party Bank is Holding the CD’s


• CD's Must be Clean and Clear - No Encumbrances
  or Liens


• Market Conditions


• Bank Policy


• Currency Fluctuation, if wanted converted
  to other than US dollars


• Client Anticipation of Return


• Place Transaction Occurs

What is done with "Cash" after conversion

This is becoming a paramount issue with banks converting the instrument,
the preferred and acceptable method is to deposit a portion of the redeemed
funds with the honoring bank, usually not less than 20% for a period of
not less than six (6) months.

Hints

• Most CD's are usually issued to individuals.   


• CD's may be held by a trust, foundation,
  endowment, corporation, or nonprofit entity.    


• It is often easier to raise a 'Credit
  Line' than convert the instrument to CASH!    


• Fluctuating World Market Conditions set
  the pace and determine the trading value, if any.    


• Usually most every instrument can be converted,
  however, some are just Not desirable Trading Instruments on the current
  World Market.    


• Certain Required "Documentation'
  is needed for this type of transaction.

Documentary and Standby Letters of Credit

Effective January 1, 1999, banks may incorporate, by reference, the International Standby Practices, referred to as ISP 98, into their standby letters of credit.1 In doing so, banks will supplement and vary Article 5 of the Uniform Commercial Code ("UCC"),2 which governs letters of credit in most of the United States, and replace, as to such credits, the Uniform Customs and Practices ("UCP"),3 a statement of practices published by the International Chamber of Commerce ("ICC") that is nearly universally incorporated by reference into letters of credit. The purpose of this article is to describe when ISP 98 applies and how certain of its rules follow or vary from the UCC and the UCP.

Documentary and Standby Letters of Credit
Letter of credit law and practice, until quite recently, has evolved with the use of letters of credit in commercial sale of goods transactions. Stated simplistically, letters of credit have enabled sellers, unwilling to rely simply upon the promise of the buyers to pay for goods once the goods are loaded on board a vessel destined to the buyer’s country, to be assured that they can obtain payment once those goods are so loaded. A seller may present the agreed shipping documents to, and thereby obtain payment from, a bank whose undertaking to make such payment would be primary and independent of the contract between the seller and his buyer.

The letter of credit (or credit) is part of a three-party relationship in a commercial transaction: (1) the contract between the parties (applicant and beneficiary) pursuant to which one party (the applicant) is obligated to obtain the credit for the benefit of the other (the beneficiary), (2) the contract between the applicant and the person whom the applicant asks to issue the credit (the issuer), usually a bank or other financial institution, and (3) the undertaking by the issuer in favor of the beneficiary, to honor a presentation by payment or delivery of an item of value. The undertaking of the issuer in the letter of credit, however, is primary and must be honored without any claim, counter claim, setoff or defense that the issuer or the applicant may have against the beneficiary. This ‘independence’ of the letter of credit from the transaction between the applicant and the beneficiary is its special feature.

A letter of credit will be either a documentary or standby credit. Common to all credits is that the issuer undertakes to pay or give an item of value against a specific document or documents which accompany the request for payment. Such payment can be at the time of presentation, known as at sight, or at a later time, known as deferred payment. The issuer can give an item of value, such as a bill of exchange drawn on the bank, also payable at sight or at a later time. The documentary credit specifies the documents that must accompany the presentation, such as an invoice, bill of lading and insurance certificate. With a standby credit the presentation required by the undertaking may be the request for payment itself, with or without other documents. Frequently, a standby credit is given to support an obligation of the applicant: the beneficiary can obtain payment under the standby credit by presenting a simple demand, as specified in the credit, to the issuer. Standby credits are also used to support an obligation by the applicant to make an advance payment; they are used as bid bonds to support the bidder’s duty to execute a contract; they are used a credit support in loan transactions to ensure repayment by the borrower; and they may be used as a method of obtaining direct payment under a contract. Standby credits, as in the preceding examples, are performance, financial or direct pay undertakings.

As both documentary and standby credits are undertakings to pay against the presentation of one or more documents, the distinction between them is nowhere precisely stated and probably unnecessary to state. The UCP states that it applies to both types of credit without defining them (the definition was unnecessary). Similarly, the UCC, which applies to both, has no need to distinguish the two. ISP 98 states that it applies to standby letters of credit without defining them. In practice, the parties will determine whether a credit is a standby by choosing to incorporate ISP 98 or not. If they do, it will be subject to the special rules in ISP 98 applicable to standby credits; if not, they will presumably choose the UCP and the credit will be subject to that regime, which was developed principally for documentary credits.

Typical suggestion for a Due Diligence Checklist

1. CORPORATE ORGANIZATION
   
   
   
   1. Articles of Incorporation
      
   2. Bylaws
      
   3. Recent Changes in Corporate Structure
      
   4. Shareholder List
      
      
      
      1. Show Number of Outstanding Shares
         and Percent Owned
         
      2. Stock Option or Share Appreciation
         Rights Plans
      
      
      
      
   5. Parent, Subsidiaries and Affiliates
      
   6. Shareholder’s Agreements
      
   7. Minutes of the Board of Directors
   
   
   
   
   
   
   
2. BUSINESS INFORMATION
   
   
   
   1. Product Offering
      
   2. Depreciation Method
      
   3. Patents
      
   4. Management Information System
   
   
   
   
   
   
   
3. MARKETING
   
   
   
   1. Pricing Strategy
      
   2. Patents
      
   3. Distribution Channels
      
   4. Promotion Tactics
      
   5. Customer Base
      
      
      
      1. Top Ten Customers By Product
         Line - Showing Volume
         
      2. Market Share By Product Line
      
      
      
      
   
   
   
   
   
   
   
4. BUSINESS PLAN
   
   
   
   1. Most Recent Five Year Business Plan
      
   2. Prior Business Plan
   
   
   
   
   
   
   
5. FINANCIAL STATEMENTS
   
   
   
   1. 5 Years of Historical Audited Statements
      
      
      
      1. Income Statement
         
      
      
   
   



 

Sec Interpretation: Use of Electronic Media

Online Private Offerings under Regulation D
Broad use of the Internet for exempt securities offerings under Regulation D is problematic because of the requirement that these offerings not involve a general solicitation or advertising. When we first considered whether exempt offerings could be conducted over the Internet, we concluded that an issuer's unrestricted, and therefore publicly available, Internet web site would not be consistent with the restriction on general solicitation and advertising. Specifically, the 1995 Release included an example indicating that an issuer's use of an Internet web site in connection with a purported private offering would constitute a "general solicitation" and therefore disqualify the offering as "private."

Subsequently, the Divisions of Corporation Finance and Market Regulation issued interpretive guidance to a registered broker-dealer and its affiliate, IPONET, that planned to invite previously unknown prospective investors to complete a questionnaire posted on the affiliate's Internet web site "as a means of building a customer base and database of accredited and sophisticated investors" for the broker-dealer. A password-restricted web page permitting access to private offerings would become available to a prospective investor only after the affiliated broker-dealer determined that the investor was "accredited" or "sophisticated" within the meaning of Regulation D. Additionally, a prospective investor could purchase securities only in offerings that were posted on the restricted web site after the investor had been qualified by the affiliated broker-dealer as an accredited or sophisticated investor and had opened an account with the broker-dealer. The Divisions' interpretive letter was based on an important and well-known principle established over a decade ago: a general solicitation is not present when there is a pre-existing, substantive relationship between an issuer, or its broker-dealer, and the offerees.

We understand that some entities have engaged in practices that deviate substantially from the facts in the IPONET interpretive letter. Specifically, third-party service providers who are neither registered broker-dealers nor affiliated with registered broker-dealers have established web sites that generally invite prospective investors to qualify as accredited or sophisticated as a prelude to participation, on an access-restricted basis, in limited or private offerings transmitted on those web sites.

Frauds, Phonies and Scams

The Bureau of the Public Debt and the rest of the United States Department of the Treasury (collectively, "we" or "us") are aware of a number of fraudulent schemes (we like to call them "scams") that involve what are claimed to be securities issued or backed by us or any other part of the United States Government. These scams have been directed at banks, charities, companies, and even individuals, by individuals or organizations seeking payment on the fraudulent securities. These pages will alert you to these scams and help you protect yourself from being taken in. If you want to search for a particular term or scam, you can use our site's search engine by clicking on the find button on the left bar. However, we recommend that you look at all of these pages in order, particularly the first page, "How Marketable Treasury Securities Really Work." The better you understand our securities, the less likely it is that you'll be taken in.

Information on Financial Scandals

This page contains links to important sources of information on financial scandals, corruption and fraud, miscellaneous articles on this topic, organisations providing advice and useful sources for further research.

General Sources on Corruption or Alleged Financial Wrong-Doing



Offshore Business News & Research OBNR provides offshore business information on companies and individuals operating in countries where independent and accurate information is often difficult to obtain. Since the launch of its investigative newsletters in February, 1997, the company has exposed numerous frauds in the Bermuda-Caribbean region.

Crimenet Links to Crime, Law Enforcement and Espionage Sites Although it is not specifically devoted to financial crimes this site might be of interest to people who wish to follow up related topics.

Research Committee on Political Finance and Corruption Part of the International Political Science Association.

Business and Financial Ethics Internet Resource Center The Centre is a library of on-line information concerning business and financial ethics sponsored by the Stuart School of Business at the Illinois Institute of Technology.

The Independent Banking Advisory Service IBAS exists to give advice to people who are having problems with banks in Britain.

National Association of Bank/Insurance Customers An independent self help group for all private and commercial users of UK bank and insurance services.

National Westminster Bank Fraud A web site created by Umang Malhotra to publicise his disputes with the National Westminster Bank.

Corruption et criminalité économique A large selection of links from the Strategic Road site which also covers many related topics. There are also details of books in French on corruption.

J. Orlin Grabbe's Home Page Grabbe is a prolific writer on the subject of shady financial dealings and related topics.

Shmuel Vaknin's Macedonian Experience Site Vaknin is an Israeli economist. His site has several articles on financial scandals, including one on the typology of financial scandals. Although many of Vaknin's articles deal with the Macedonian economy he claims that the Macedonian economic experience is so generic and so widespread, so varied and so concentrated - that it really served as an ideal laboratory.

Stock Detective Stock Detective ventures into dens of dubious dealings to uncover the truth for all investors.

TheTruthseeker.com An Interactive Online Magazine and E-mail service site with a mission to expose the underbelly of Wall Street.

Mario's Cyberspace Station A website covering espionage, political wrong-doing, and corruption. It is the creation of Mario Profaca, a Croatian journalist. Among the pages are ones on scandalous money and dirty money.

Internet Scambusters A free electronic newsletter on Internet-based scams. The site has links to other relevant sites.

Money Fraud: Financial Scandals An About.Com feature with links to sources of information.

AuditNet's Fraud/Investigative Resources Links selected by Jim Kaplan of AuditNet.

Government Accountability Project The mission of the US Government Accountability Project is to protect the public interest and promote government and corporate accountability by advancing occupational free speech, defending whistleblowers and empowering citizen activists. The site includes some links to whistleblower sites in other countries.

Funding mega dollar projects utilizing bank guarantees (BG's) or other bank instruments

Another option for 'Funding Mega Dollar Projects' is to use Bank Guarantees (BG's), or similar Bank Instruments.

This is an excellent option for 3rd world countries. The government has a prime 'Bank' issue the Bank Guarantee to the Developer who was awarded the 'Project'. This can be for any type of project:

B.O.T. - Build, Operate, and Transfer
B.O.O. - Build, Operate, and Own
Environmental Project
Construction Project
Hospital or Medical Facility
ManufacEagle Tradersg Facility
Development Project
Quasi Government Project
Government Project
Nature and Natural Preservation Projects - Save the Rain Forest, Plant Tree Farms, etc.
Other

In principal this is how it works
The client may composite the value of the 'Contract' into a series of transactions utilizing Bank Guarantees (BG's) or similar Bank Instruments, whereby they (the client) do large project amounts ranging in increments of 20 to 100 million US Dollars utilizing corresponding Bank Instrument amounts.

However, the cash value (actual conversion amount) of each BG or Bank Instrument must be paid in full at time of every transaction for each of these larger projects. This is done in phases (stages over a period of time) during a predetermined schedule or life of the project.

The basic criteria would be a project or a series of projects rolled into one entity with a contract value of 200 million US dollars and above.

Example
Since projects are generally time phased for payments, the first payment on a 200 million US Dollar project could be 20m. The client would have issued a Bank Instrument such as a BG for 20m. The 'Bank Instrument', such as a BG, is then converted to real working dollars based on the market value of the instrument at the time.

Corporate Promissory Notes (Continue....2)

Helpful hints:

CPN's are usually issued by a corporation as collateral or for the sole purpose of raising capital (liquid assets in the form of cash).

CPN's held by individuals are highly questioned by banks throughout the world. It is generally easier to raise a 'Credit Line' than convert this type of instrument into CASH!

Fluctuating World Market Conditions set the pace and determine the trading value, if any.

Usually most every instrument can be converted, however, some are just Not desirable

Trading Instruments on the current World Market.

Substantiated "Documentation' is needed for this type of transaction.


The Following Corporate Promissory Notes are very difficult to do at the present, and only a 'Credit Line' could be raised:

Any CPN issued from any Corporation in Indonesian unless backed by a Major World Bank.

Any CPN issued from any Corporation in Thailand unless backed by a Major World Bank.

Any CPN issued from any Corporation in Philippines unless backed by a Major World Bank.

Any CPN issued from any Corporation in Malaysia unless backed by a Major World Bank.

Any CPN issued from Corporation in Russia unless backed by a Major World Bank.

Any CPN held by an Individual in lieu of a company, trust, corporation, endowment, or
nonprofit entity.

The Following CPN's Are NOT Currently Tradable:

CPN's issued from Vietnam

CPN's issued from Cambodia

CPN's issued from Laos

CPN's issued from Burma


Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applied to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Corporate Promissory Notes (Continue....1)

Corporate Promissory Notes (CPN's) - Issued by Major Corporations, usually public listed and underwritten by a Bank or Underwriter. This can be any foreign bank, or a Central Bank from country of origin.

Convert to Cash like handling a BG or raise a Credit Line.

Value conversion depends on many factors, some fixed, some floating such as…

Type of Promissory Note (time, maturity date, ownership, value, etc.)

Issuing Corporate Rating (preferably a Dunn and Bradstreet or similar Credit Rating)

Underwriting or Guarantor Bank and their Rating (Central Bank of a Government, Local in
Country Bank, Foreign Worldwide Bank, etc.)

Agent, Underwriter, Security House, or Bank Holding Promissory Note

What type of ‘Currency’, US Dollars is always preferred, but most others are acceptable

Market Conditions

Bank Policy or Underwriter Policy

Politics

Ownership, and Type of Restrictions, if any

Currency Fluctuation, if not already in US dollars

Client Anticipation of Return

Place Transaction Occurs

What is done with ‘Cash’ after conversion - this is becoming a paramount issue with banks or security houses converting the instrument, the preferred and acceptable method is to deposit a portion of the redeemed funds with the honoring bank or security house, usually as follows...


(1) For a 'Bank' not less than 50% for a period of not less than six (6) months.
(2) For a 'Security Trading House' not less than 30% either reinvested in other
types of asset portfolio management (stocks, bonds, mutual funds, etc.)
or in their money market fund.

Corporate Medium Term Notes (MTNs)

"Corporate MTNs", are simple one mechanism available to selling off Corporate Debt. These 'Corporate MTNs' are sold and traded on the Open Market, just like any other stock, security, or bank instrument.

It is often very advantageous for a company to sell off their "Debt."

Some advantages are:

(1) Getting Rid of the Debt
(2) Raising Capital
(3) Better Market Exposure
(4) Freeing Up Assets to Pursue Other Things

IN A FINANCIAL WORLD GONE CRAZY, DEBT IS AN 'ASSET'

Dr. Money's Team is ready to assist You:

(1) Creating the avenue to Sell "New Bonds"
(2) Arranging to Sell "Existing Bonds"


Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Corporate Bonds

"Corporate Bonds", are simple one mechanism available to selling off Corporate Debt. These 'Bonds' are sold and traded on the Open Market, just like any other stock, security, or bank instrument.

It is often very advantageous for a company to sell off their "Debt."

Some advantages are:

(1) Getting Rid of the Debt
(2) Raising Capital
(3) Better Market Exposure
(4) Freeing Up Assets to Pursue Other Things


The Eagle Traders is ready to assist You:

(1) Creating the avenue to Sell "New Bonds"
(2) Arranging to Sell "Existing Bonds"


Important Notice:
It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Bank Guarantees (BG’s)

Bank Guarantees (BG’s) - Raise a Credit Line or Cash them in for real dollars.

Value conversion depends on many factors, some fixed, some floating such as…

Ownership of BG - Corporate or Private - Corporate is Highly Preferred

The Type of BG

Issuing Bank Rating as well as location (branch) of Bank Issuing the BG

Physical Location of the Original BG - Safety Deposit Box, Corporate Office Safe, Home, etc.

If an Agent, Security House, or Third Party Bank is Holding BG’s

BG must be in US Dollars only

Market Conditions

Bank Policy

Client anticipation of return

Place transaction occurS

What is done with ‘Cash’ after conversion - this is becoming a paramount issue with banks
converting the instrument, the preferred and acceptable method is to deposit a portion
of the redeemed funds with the honoring bank, usually not less than 50% for a period
of not less than six (6) months.


Some Helpful Hints Before Starting....

BG's are usually issued by a corporation as collateral.

BG's held by individuals are highly questioned by banks throughout the world.

It is generally easier to raise a 'Credit Line' than convert the instrument to CASH!

Fluctuating World Market Conditions set the pace and determine the trading value, if any.

Usually most every instrument can be converted, however, some are just Not desirable

Trading Instruments on the current World Market.
Substantiated "Documentation' is needed for this type of transaction.

The Following Bank Guarantees are very difficult to do at the present, and only a 'Credit Line' could be raised:

1. Any BG issued from any Indonesian Bank

2. Any BG issued from any Thailand Bank

3. Any BG issued from any Philippine Bank

4. Any BG issued from any Malaysian Bank

Any BG held by an Individual in lieu of a company, trust, corporation, or nonprofit entity

The Following BG's Are NOT Currently Tradable:

1. BG's issued from Russia

2. BG's issued from Vietnam

3. BG's issued from Cambodia

4. BG's issued from Laos

5. BG's issued from Burma


Important Notice:

It is widely considered a trading rule that any securities are deemed NOT Tradable if they originate from a non recognized international public trading exchange. This applies to Any type of Security Note (stock, bond, mutual fund, trust, MTN, debentures, etc.).

Capital Markets

Short-term investments and borrowing are driven by the available rates in the market for these products and services. Likewise, long-term rates in the debt and equity markets will determine the cost of capital for an organization. This section provides sites which offer information to the treasurer on various rates for different segments of the market.

The Federal Reserve Bank of New York provides one of the better sites for daily rates on commercial paper (CP) and foreign exchange (FX). Daily rates are available for dealer-placed and direct-placed commercial paper plus 36 foreign currencies. These are the noon buying rates "as certified by the New York Federal Reserve Bank for customs purposes." All of the rates shown are expressed in terms of foreign currency values (e.g., 118.33 yen/dollar) except for U.K. Sterling rates which are shown in terms of U.S. dollars per pound. In addition, you can access the New York Federal Reserve's 10:00 A.M. midpoint (between buying and selling rates) foreign exchange rates daily for major currencies expressed in foreign currency units:

1. Pound Sterling (expressed in US$ equivalents)
2. Canadian Dollar
3. French Franc
4. German Mark
5. Swiss Franc
6. Japanese Yen
7. Dutch Guilder
8. Belgian Franc
9. Italian Lira
10. Swedish Krone
11. Norwegian Krone
12. Danish Krone

Section 1109.32

A BANK MAY INVEST IN ANY OF THE FOLLOWING:

(1) BONDS, BILLS, NOTES, OR OTHER DEBT SECURITIES OF THE UNITED STATES OR FOR WHICH THE FULL FAITH AND CREDIT OF THE UNITED STATES IS PLEDGED FOR PAYMENT OF PRINCIPAL AND INTEREST;

(2) BONDS, NOTES, OR OTHER DEBT SECURITIES ISSUED BY THIS STATE, OR ANY STATE OF THE UNITED STATES, THAT ARE THE DIRECT OBLIGATION OF THE ISSUER AND FOR WHICH THE FULL FAITH AND CREDIT OF THE ISSUER IS PLEDGED TO PROVIDE PAYMENT OF THE PRINCIPAL AND INTEREST;

(3) BONDS, NOTES, OR OTHER DEBT SECURITIES OF ANY COUNTY, MUNICIPAL CORPORATION, TOWNSHIP, SCHOOL DISTRICT, IMPROVEMENT DISTRICT, SEWER DISTRICT, OR OTHER SUBDIVISION OF THIS STATE OR ANY OTHER STATE OF THE UNITED STATES, THAT ARE THE DIRECT OBLIGATION OF THE COUNTY OR THE SUBDIVISION ISSUING THEM AND FOR WHICH THE FULL FAITH AND CREDIT OF THE ISSUING COUNTY OR SUBDIVISION IS PLEDGED TO PROVIDE PAYMENT OF PRINCIPAL AND INTEREST;

(4) BONDS OR OTHER DEBT OBLIGATIONS ISSUED OR GUARANTEED BY AGENCIES OR INSTRUMENTALITIES OF THE UNITED STATES, REGARDLESS OF THE GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST BY THE UNITED STATES;

(5) SUBJECT TO CONDITIONS AND RESTRICTIONS THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS MAY PRESCRIBE, BONDS, DEBENTURES, AND OTHER DEBT SECURITIES ISSUED BY ANY COUNTRY OR MULTINATIONAL ORGANIZATION THAT ARE THE DIRECT OBLIGATION OF THE ISSUING

A brief history of bond valuation

The value of any bond is the present value of its expected cash flows. This sounds simple: Determine the cash flows and then discount those cash flows at an appropriate rate. In practice, it’s not so simple for two reasons. First, holding aside the possibility of default, it is not easy to determine the cash flows for bonds with embedded options. Because the exercise of options embedded in a bond depends on the future course of interest rates, the cash flow is a priori uncertain. The issuer of a callable bond can alter the cash flows to the investor by calling the bond, while the investor in a putable bond can alter the cash flows by putting the bond. The future course of interest rates determines when and if the party granted the option is likely to alter the cash flows.

A second complication is determining the rate at which to discount the expected cash flows. The usual starting point is the yield available on Treasury securities. Appropriate spreads must be added to those Treasury yields to reflect additional risks to which the investor is exposed. Determining the appropriate spread is not simple, and is beyond the scope of this article. The ad hoc process for valuing an option-free bond (i.e., a bond with no options) once was to discount all cash flows at a rate equal to the yield offered on a new full-coupon bond of the same maturity. Suppose, for example, that one needs to value a 10-year option-free bond. If the yield to] maturity of an on-the-run 10-year bond of given credit quality is 8%, then the value of the bond under consideration would be taken to be the present value of its cash flows, all discounted at 8%.

According to this approach, the rate used to discount the cash flows of a 10-year current-coupon bond would be the same rate as that used to discount the cash flow of a 10-year zero-coupon bond. Conversely, discounting the cash flows of bonds with different maturities would require different discount rates. This approach makes little sense because it does not consider the cash flow characteristics of the bonds. Consider, for example, a portfolio of bonds of similar quality but different maturities. Imagine two equal cash flows occurring, say, five years hence, one coming from a 30-year bond and the other coming from a 10-year bond. Why should these two cash flows have different discount rates and hence different present values?

Given the drawback of the ad hoc approach to bond valuation, greater recognition has been given to the fact that any bond should be thought of as a package of cash flows, with each cash flow viewed as a zero-coupon instrument maEagle Tradersg on the date it will be received. Thus, rather than using a single discount rate, one should use multiple discount rates, discounting each cash flow at its own rate.

One difficulty with implementing this approach is that there may not exist zero-coupon securities from which to derive every discount rate of interest. Even in the absence of zero-coupon securities, however, arbitrage arguments can be used to generate the theoretical zero-coupon rate that an issuer would have to pay were it to issue zeros of every maturity. Using these theoretical zero-coupon rates, more popularly referred to as theoretical spot rates, the theoretical value of a bond can be determined. When dealer firms began stripping of full-coupon Treasury securities in August 1982, the actual prices of Treasury securities began moving toward their theoretical values.

Another challenge remains, however—determining the theoretical value of a bond with an embedded option. In the early 1980s, practitioners came to recognize that an option-bearing bond should be viewed as a package of cash flows (i.e., a package of zero-coupon instruments) plus a package of options on those cash flows. For example, a callable bond can be viewed as a package of cash flows plus a package of call options on those cash flows. As such, the position of an investor in a callable bond can be viewed as:

Long a Callable Bond = Long an Option-Free Bond + Short a Call Option on the Bond.

In terms of the value of a callable bond, this means:

Value of Callable Bond = Value of an Option-Free Bond - Value of a Call Option on the Bond.

But this also means that

Value of an Option-Free Bond = Value of Callable Bond + Value of a Call Option on the Bond.

An early procedure to determine the fairness of a callable bond’s market price was to isolate the implied value of its underlying option-free bond by adding an estimate of the embedded call option’s value to the bond's market price. The former value could be estimated by applying option pricing theory as applied to interest rate options.

This insight led to the first generation of valuation models that sought to value a callable bond by estimating the value of the call option. However, estimation of the call option embedded in callable bonds is not that simple. For example, suppose a 20-year bond is not callable for five years after which time it becomes callable at any time on 30-days notice.

Model for valuing bonds and embedded options

Background
One can value a bond by discounting each of its cash flows at its own zero-coupon ("spot") rate. This procedure if equivalent to discounting the cash flows at a sequence of one-period forward rates. When a bond has one of more embedded options, however, its cash flow is uncertain. If a callable bond is called by the issuer, for example, its cash flow will be truncated.

To value such a bond, one must consider the volatility of interest rates, as their volatility will affect the possibility of the call option being exercised. One can do so by constructing a binomial interest rate tree that models the random evolution of future interest rates. The volatility-dependent one-period forward rates produced by this tree can be used to discount the cash flows of any bond in order to arrive at a bond value.

Given the values of bonds with and without an embedded option, one can obtain the value of the embedded option itself. The procedure can be used to value multiple or interrelated embedded options, as well as stand-alone risk control instruments such as swaps, swaptions, caps and floors.

Introduction
In the good old days, bond valuation was relatively simple. Not only did interest rates exhibit little day-to-day volatility, but in the long run they inevitably drifted up, rather than down. Thus the ubiquitous call option on long-term corporate bonds hardly ever required the attention of the financial manager. Those days are gone. Today, investors face volatile interest rates, a historically steep yield curve, and complex bond structures with one or more embedded options. The framework used to value bonds in a relatively stable interest rate environment is inappropriate for valuing bonds today. This article sets forth a general model that can be used to value any bond in any interest rate environment.

The mechanics of bank SLCS and guarantees

The driving force behind the financial instruments under discussion in this paper is the U.S. government through its monetary agency, the Federal Reserve Board. The U.S. dollar is the basis of the world's liquidity system since all other currencies base their exchange rate on it. Quite simply this means that the U.S. is the world's central banker. As the world's central banker, the U.S. has an enormous responsibility to maintain stability in the world's monetary system. As well, the U.S. as the most powerful nation has accepted the role as the champion and promoter of democracy in all of its endeavors. While the U.S. has many tools to do this, one in particular is relevant for the purposes of this discussion.

The Federal Reserve Board (Fed) uses two financial instruments to control and utilize the amount of U.S. dollars in circulation internationally: Standby Letters of Credit (SLC) and Bank Guarantees (BG).

The Fed's domestic tools to control credit creation are interest rate policy, open market operations, reserve ratio policy and moral persuasion. In the domestic context, these tools are not always as effective as the Fed would like them to be. Part of the reason for the less than perfect effectiveness is due to the substantial stock of U.S. dollars in foreign jurisdictions. Several of the Fed's domestic tools cannot be used by it in other countries. For examples, the Fed cannot change foreign reserve ratios.

Furthermore, a significant amount of credit creation occurs in U.S. dollars in foreign countries, particularly in the Eurodollar market.

ICC endorsement of the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit

On the unanimous consent of its Commission on Banking Technique and Practice, the International Chamber of Commerce endorses the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit.

Since its earliest years, ICC has provided important international leadership in the field of international banking operations, particularly as a forum for developing rules of practice. Since 1933, the Uniform Customs and Practice for Documentary Credits (UCP), in its various revisions, has become a universally recognized standard, stating and establishing custom and practice for letters of credit.

In this process, the United Nations Commission on International Trade Law (UNCITRAL), by its endorsement of the subsequent UCP versions, provided an important bridge to those countries who were at the time unable to participate directly in the work of ICC. Other ICC rules, such as Incoterms, have also been endorsed by UNCITRAL, which has contributed to their international acceptance.

ICC rules cannot be fully effective in all countries without their being recognized under local law. In this respect, the recent work of UNCITRAL on the United Nations Convention on Independent Guarantees and Stand-by Letters of Credit provides an important impetus to attain this objective. The Convention sets forth the basic principles of law for independent undertakings in a manner which fully assures their independent nature, which guarantees widest possible party autonomy and which establishes a uniform international legal standard for limits to the exception for fraudulent or abusive drawings.

ICC appreciates that the Convention was drafted in full recognition of the role of the various ICC rules in this field, that the UNCITRAL Working Group was directly and indirectly influenced by, and in turn influenced, the revision of the UCP, ICC's Uniform Rules for Demand Guarantees (URDG) and its recently adopted rules on International Standby Practices (ISP 98). ICC also notes that the UN Convention expressly defers to international banking practice as represented by ICC rules.

History and Development of Bank Instruments (Continue....2)

Marshall plan - lMF - World Bank and Bank of International Settlements
The Bretton Woods Convention produced the Marshall Plan, the Bank for Reconstruction and development known as the World Bank. the International Monetary Fund (IMF) and the Bank of International Settlements (BIS). These four would re-establish and revitalize the economies of the western nations. The World Bank would borrow from rich nations and lend to poorer nations. The IMF working closely with the World Bank, with a pool of funds, controlled by a board of governors. would initiate currency adjustments and maintain the exchange rates among national currencies within defined limits. The Bank of International Settlements would then function as a "central bank" to the world.

The International Monetary Fund was to be a lender to the central bank of countries which were experiencing a deficit in the balance of payments. By lending money to that country's central bank, the IMF provided currency, allowing the underdeveloped country to continue in business. building up is export base until it achieved a positive balance of payments. Then, that nation's central bank could repay the money borrowed from the lMF, with a small amount of interest and continue on its own as an economically viable nation. If the country experienced an economic contraction, the IMF would be standing ready to make another loan to carry it through.

Bank of International Settlements
The Bank of International Settlements (BIS) was created as a new central bank to the central banks of each nation. It was organized along the lines of the U.S. Federal Reserve System and it's principally responsible for the orderly settlement of transactions among the central banks of individual countries. In addition, it sets standards for capital adequacy among the central banks and coordinates the orderly distribution of a sufficient supply of currency in circulation necessary to support international trade and commerce.

The Bank of International Settlements is controlled by the Basel Committee which is comprised of ministers sent from each of the G-10 nations central banks.