| Margin Requirements - US Bonds
Margin Requirements - US BondsGovernment Bonds Municipal Bonds Corporate Bonds Special Margin Bonds
The following rules apply to both Reg T Margin and Portfolio Margin[1] accounts. Bonds must be paid-in-full in a Cash account. FINRA and the NYSE have imposed rules to limit small investor day trading. If a client is classified as a Pattern Day Trader (PDT) by one of these organizations, then the client will be subject to special Day Trading Restrictions for US securities.
Government Bonds
Municipal BondsPortfolio Margin does not apply to Treasury Securities, thus, these securities are not eligible for portfolio margin treatment. However, Place Trade clients may carry Treasury Securities in a portfolio margin account if Place Trade is able to apply the applicable margin rates to these securities separately.
Corporate BondsThe margin for the following types of corporate bonds is determined using a proprietary Value At Risk (VAR) methodology[1]: ■ Investment Grade ■ NYSE-listed Speculative Grade ■ NYSE-listed Junk Grade
What Happens to the value of my bonds when interest rates change? Will I make money or will I lose money on my bond when interest rates go up or down?There is an inverse relationship between a bond's price and yield. What does that mean? When one goes up, the other goes down. (On the Price-Yield Curve: when a bond's price increases the yield decreases and vice versa. Similarly, as a bond's market yield decreases, its duration increases (and vice versa). The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing Treasury yield curve. The result of such a calculation is illustrated in the following figure. As the interest rate offset increases, the bond price decreases. The upward curvature of the line is indicative of the "convexity" of the bond. The higher the coupon rate is for a bond, the lower its convexity will be. The lower the coupon rate is for a bond, the higher its convexity will be. Therefore, Zero Coupon bonds have the highest convexity. Convexity definition What is convexity? What is duration? Duration definition
How Do Changing Interest Rates Impact the Price of a Bond?
What is the VAR? VAR DefinitionThe VAR is the loss (in the worst case) in the bond price over a specified range of underlying interest rate changes. The scanning ranges are listed in the table below.
Within the Value At Risk calculation, bonds that contain embedded options (calls or puts) are subjected to stress tests that separately increase and decrease the interest rate period volatilities used to calculate the theoretical price of the bond by 15% of their values. Under each volatility change scenario, another theoretical price curve is calculated over the same range of interest rate offsets to the prevailing Treasury yield curve. The VAR for bonds with embedded options is taken as the loss (in the worst case) on the appropriate interest rate scanning range across each of the unchanged, up and down volatility scenarios. The regulatory minimum margin of 10% of market value applies to investment grade bonds. The regulatory minimum of the larger of 20% of market value and 7% of face value applies to non-investment grade, NYSE-listed bonds.
Non-NYSE-Listed Speculative and Junk Bonds are margined as follows:
Please Note: Bonds that have defaulted or are not rated are not eligible for margin treatment. 
Place Trade may reduce the collateral value of securities (reduces marginability) for a variety of reasons, including: ■ small market capitalization or small issue size ■ low liquidity in the collective primary/secondary exchanges ■ involvement in tenders and other corporate action Changes in marginability are generally considered for a specific security. However, in cases of concerns about the viability or liquidity of a company, marginability reductions will apply to all securities issued by, or related to, the affected company, including bonds, derivatives, depository receipts, etc. In addition, please see discussions on special risk management algorithms, for example, large position and position concentration algorithms which may affect the margin rate applied to a given security within an account and may vary between accounts.
The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing Treasury yield curve. As the interest rate offset increases, the bond price decreases. The upward curvature of the line is indicative of the "convexity" of the bond. Corporate Bonds ■ Investment Grade ■ NYSE-listed Speculative Grade ■ NYSE-listed Junk Grade rgb(29, 29, 111) |
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