Important Information about Fidelity's Bond Offering
- Risks associated with all individual fixed income securities
- Additional information and risks associated with Treasury bonds
- Additional information and risks associated with brokered certificates of deposit (CDs)
- Additional information and risks associated with agency and GSE bonds
- Additional information and risks associated with municipal bonds
- Additional information and risks associated with corporate bonds
- Additional information and risks associated with fixed rate capital securities and trust preferred securities
- Additional information and risks associated with structured products
- Other risks
- More about Fidelity's bond offerings
- Impartial lottery process for partially called securities
As with any type of investment, there is a trade-off between the risk you are willing to assume and the potential return you may receive when you invest in fixed income securities. In general, greater potential return or reward, is usually associated with greater risk. There are a number of key variables that comporise the risk profile of a bond: its price, interest rate, yield, maturity, liquidity, redemption features, , credit quality and tax status. Together, these factors help determine the value of a bond and should be considered when determining whether it is an appropriate investment for your portfolio.
Regardless of the type of bond you are considering investing in, you need to research the bond and the issuer. The review of a prospectus, official statement, statement of financial condition or amendments to these types of documents is critical. All of these can be found on public websites and should be part of any investment decision-making process.
In order to understand how market risks may affect your investments, it is important to understand how bonds trade.
New issue and secondary markets
Fidelity offers investors the opportunity to participate in both the new issue and secondary bond markets. The new issue market has a significant presence in the bond market because issuers are constantly coming to the new issue market to "roll" their existing debt as well as to create new debt. The new issue market varies in its accessibility for individual investors with the Treasury market being the most accessible and the corporate market the least accessible.
The secondary market is composed of bonds that were issued in the past and may be traded until they are redeemed by the issuer. Investors pay no commissions or concessions when participating in new issue offerings but brokers do levy a concession or commission in the secondary market.
Price The price you pay for a bond is based on many variables, including interest rates, supply and demand, liquidity, credit quality, maturity, lot size, redemption features, and tax status. Most new issues normally sell at or close to par (100 percent of the face, or principal, value) while bonds traded in the secondary marketfluctuate in price in response to many of the variables described above, as well as general economic conditions. When the price of a bond rises above its face or par value, it is said to be selling at a premium. When a bond sells below face or par value, it is said to be selling at a discount. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss.
Interest Rates and Zero-Coupon Bonds
Bonds can pay interest in a variety of ways. This interest may be paid periodically or at maturity.
- Fixed: These bonds carry a coupon rate that is established when they are issued and stays fixed until maturity. It is typically a percentage of the face (principal) amount and may pay monthly, annual or semiannual interest payments.
- Step: Step coupon bonds generally pay a fixed rate of interest until the call date at which time the coupon either increases (in the case of a step-up bond) or decreases (in the case of a step-down bond), assuming the bond is not called.
- Floating: Floating rate bonds have a coupon rate which resets periodically based on a benchmark interest-rate index. This reset can occur multiple times per year. The coupon and benchmark may also have an inverse relationship with each other.
- Zero-Coupon: This type of bond does not make periodic interest payments. Investors buy the bond at a discounted price (original issue discount), which reflects the present value based on the interest rate on the bonds, and receive one payment at maturity. The payment is equal to the invested principal plus the accumulated interest earned (compounded annually to maturity). Since all the accrued interest and principal are payable only at maturity, the prices of this type of bond are more sensitive to changes in interest rates than those of coupon bonds. If the bond is taxable, the interest is taxed as it accrues, even though it is not paid to the investor before maturity or redemption.
Note: Floating and variable or adjustable-rate bonds may have restrictions on the maximum and minimum coupon reset rates.
Maturity refers to the date on which the principal amount of a bond becomes due and payable. Generally, this ranges from one year to 30 years.
Yield is the rate of return an investor expects on the bond if held until its maturity date or call date, based on the purchase price and the interest payment received.
- Current yield is equal to a bond's annual interest payment divided by its current market price. For example, if the current price of a $1,000 par bond is $1000 and the annual interest payment is $70, the current yield is 7%.
- Yield to maturity is the rate of return expected on a bond if it is held to maturity date. The calculation of yield to maturity takes into account the purchase price, par value, coupon rate, and time to maturity. It assumes that all coupon payments are reinvested at the same rate.
- Yield to call is the yield on a bond assuming the bond will be redeemed by the issuer on a specified call date. The calculation of yield to call takes into account the current market price, call price, coupon rate, and the length of time to the call date.
- Yield to worst refers to the lowest potential yield anticipated on a bond. Bonds are typically bid or offered on a yield to worst case scenario.
The current opinion of the creditworthiness of an issuer or the relative credit risk of an individual fixed income security according to Standard & Poor's, Moody's, and Fitch. These are the three primary independent rating services that provide evaluations of a bond issuer's ability to pay a bond's principal and interest in a timely fashion.
Certain risks may be applicable to any fixed income security, including but not necessarily limited to the following:
Default Risk: If a bond issuer fails to make either a coupon or principal payment on its bonds as they come due, it is said to be in default. This could arise in connection with the issuer's bankruptcy or a failure to meet some other provision of the bond indenture, such as a reporting or debt service reserve requirement. Bondholders are creditors of an issuer, and therefore in the event of a default, their interests in the assets of an issuer take priority over stock holders when receiving a payout from the liquidation or restructuring of an issuer. There are also differences in the order of priority of payment among all the bond holders of an issuer, and the type of bond you hold will determine your status.
Credit Risk: A bond's credit quality is an important consideration when evaluating investment choices. Credit ratings services may assign a credit rating to a bond and/or a bond issuer based on analysis of the issuer's financial condition and management, economic and debt characteristics, and the specific revenue sources securing the bond. The highest ratings are AAA (S&P) and Aaa (Moodys). Bonds rated BBB/Baa and higher are considered investment-grade; bonds with lower ratings are considered higher risk, speculative or high yield. Lower-rated bonds will often have higher yields to compensate investors for increased risk. You should consider your risk tolerance when evaluating potential bond investments. In the case of municipal bonds, the issuer may pay a premium to an insurer, who will then provide interest and principal payments on the bond in the event of the issuer's failure to do so. The credit rating of these insured bonds can be higher than that of the issuer. Evaluating the rating of the insurer as well as the issuer is recommended for a more complete assessment of the bond's credit risk profile. The rating of the issuer is sometimes referred to as underlying rating. Should something cause a rating agency to change its rating for a particular bond or issuer, the bond's market price and yield are also likely to change. Fidelity encourages you to learn more about the ratings definitions and methodologies used by the various ratings services at:
This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor's. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs OR LOSSES CAUSED BY NEGLIGENCE) in connection with any use of THEIR CONTENT, INCLUDING ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities for investment purposes, and should not be relied on as investment advice.
Liquidity risk: There are many factors that influence the ability of an investor to sell their bond prior to maturity and the price they will receive. The two most significant are changes to the bond issuer's credit ratings and the prevailing interest rates. The size of the bond's original issuance may also affect liquidity, and the bond may have features or attributes that are not attractive to buyers in the current market. Bonds are generally more liquid during the initial period after issuance because that is when the largest volume of trading in the bond generally occurs. The individual bond type is also a factor in determining liquidity
Interest rate risk: Interest rate movements almost always have an impact on bond prices. When interest rates rise, the price of existing bonds typically falls. If you sell your bond into this type of interest rate environment, you will probably get less than you paid for it. The volatility created by interest rate risk is greater for longer-term bonds and usually declines as the maturity date gets closer.
Call provisions: Bonds may have a call feature that allows or requires the issuer to redeem the bonds at a specified price and date before their maturity. Since a call provision offers protection to the issuer, callable bonds usually offer a higher yield than non-callable bonds in order to compensate the investor for the risk of having to reinvest the proceeds of a called bond at a lower interest rate. Bonds are often called when interest rates have declined since the bond was issued. Before you buy a bond, check to see if there is a call feature and, if there is, be sure to consider the yield to call as well as the yield to maturity. Investors considering the purchase of callable bonds should use caution, since a call may result in a lower than expected yield or even a loss. Investors may also face reinvestment risk which is discussed later in this document. Investors should also be aware of extraordinary redemption provisions, which give an issuer the right to call the bonds due to a one-time occurrence, as specified in the offering statement. The circumstances that trigger extraordinary redemption can include natural disasters, interruption to revenue sources, unexpended bond proceeds, and cancelled projects. Investors should read the offering statement carefully to understand all of the circumstances by which an extraordinary redemption can be triggered and the risks associated with such redemptions.
Put provisions: A bond may have a put provision, which gives an investor the option to sell the bond to an issuer at a specified price and date prior to its maturity. Typically, investors exercise a put provision when they need money or when interest rates have risen so that they may then reinvest the proceeds at a higher interest rate. Since a put provision offers some protection to the investor, bonds with such features usually offer a lower annual return than bonds without a put. A voluntary or "death put" often allows the beneficiary of an estate to put the bond back to the issuer in the event of the beneficiary's death or legal incapacitation. This is also known as a "survivor's option". Note that the issuer may limit the aggregrate number of bonds it will allow to be put back in a given year. An investor may have to wait until the following year to exercise the put.
Reinvestment risk: In a declining interest rate environment, bondholders risk having to reinvest their interest income and any return of principal, whether scheduled or unscheduled, at lower prevailing rates.
Inflation risk: In an environment of high or increasing inflation, a bond investor is at risk of reduced purchasing power, based on future future cash flow (coupon payments and principal).
Prepayment risk: Some classes of individual bonds, including mortgage-backed bonds, are subject to prepayment risk. Similar to call risk, prepayment risk is the risk that the issuer of a security will accelerate principal payments prior to the bonds maturity date, thereby changing the expected payment schedule of the bonds. This is especially prevalent in the mortgage-backed bond market, where a drop in mortgage rates can initiate a refinancing wave. When homeowners refinance their mortgages, the investor in the underlying pool of mortgage-backed bonds receives his or her principal back sooner than expected, and must reinvest at lower, prevailing rates.
Market risk: Market risk is the risk that the bond market as a whole may decline, bringing the value of individual securities down with it, regardless of their fundamental characteristics.
Selection risk: Selection risk is the risk that an investor chooses a security that underperforms the market for reasons that cannot be anticipated.
Legislative risk: Legislative risk is the risk that changes in legislation can have an impact on the value of an investment. For example, a change in the tax code could affect the value of taxable or tax-exempt interest income.
Concentration risk: Concentration risk is the risk that an investor is insufficiently diversified by having a concentrated portfolio of bonds issued by a small number of issuers, issues, or particular sectors.
Foreign risk: In addition to the risks mentioned above, there are additional considerations for bonds issued by foreign governments and corporations. These bonds can experience greater volatility, due to increased political, regulatory, market, or economic risks. These risks are usually more pronounced in emerging markets, which may be subject to greater social, economic, regulatory, and political uncertainties.
Lower Yields: Treasury securities typically offer lower rates than most other securities due to the lower perceived default risk of the U.S. federal government.
Although the United States receives the highest rating from Moody's, Standard & Poor's recently lowered the long term debt rating of the United States from AAA to AA+. (Treasury securities on Fidelity.com will display with a rating of NR or "–" because S&P does not currently assign ratings to individual Treasury securities.) Investors should be advised that large budget deficits and high levels of indebtedness (among other factors) could have an impact on the U.S. government's ability to meet its credit obligations, and therefore could cause ratings agencies to revise their ratings.
Fidelity makes new issue CDs available without a separate transaction fee. Fidelity Brokerage Services and National Financial Services LLC receive compensation for participating in the offering as a selling group member or underwriter.
FDIC Insurance: FDIC insurance is limited to $250,000 per individual account owner, per institution for depository assets held in non-retirement accounts. Fidelity does not monitor to see if an investor has exceeded FDIC insurance coverage limits. Because the insurance limit is determined based upon the aggregate of all an investors holdings at a particular institution, investors should consider the extent to which other accounts, deposits, or accrued interest may exceed applicable FDIC limits.
FDIC insurance covers the principal amount of the CD and any accrued interest, so in cases where, brokered CD's are purchased on the secondary market at a price which reflects a premium to their principal value, this premium is ineligible for FDIC insurance
Selling before maturity: Brokered CDs sold prior to maturity are subject to a concession and may be subject to a substantial gain or loss due to interest rate changes and other factors. The market value of a CD in the secondary market may be different from its purchase price, and may fluctuate in response to changes in interest rates and other factors. The secondary market for CDs is generally illiquid.
Lower Yields: Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than those of riskier investments.
Step rate CDs: If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. Step rate CDs are subject to secondary market risk and often include a call provision that can subject you to reinvestment risk. The initial rate cannot be used to calculate the yield to maturity.
Many U.S. government agencies and government-sponsored enterprises (GSEs) issue debt securities to finance activities supported by public policy, such as home ownership, farming, and small-business operations. These issuers are able to borrow at favorable rates and channel the proceeds into programs that make credit available to sectors of the economy that would not otherwise enjoy such affordable sources of funding.
The federal agency market includes debt securities issued by Federal Home Loan Banks, Freddie Mac, Fannie Mae, Federal Farm Credit Banks, and the Tennessee Valley Authority, among others.
Agency and GSE debt securities are not backed by the U.S. federal government. Investors considering Agency and GSE bonds are encouraged to visit the issuers' websites to learn more about them and the bonds they issue.
Municipal bond investors are encouraged to visit emma.msrb.org for important information on municipal bonds and their issuers. The Municipal Securities Rulemaking Board's Electronic Municipal Market Access System (MSRB EMMA) is a comprehensive source for official statements, continuing disclosure documents (including notices of material events and financial/operating documents), advance refunding documents and real-time trade price information on municipal securities. The MSRB Investor Toolkit provides helpful information about navigating the municipal market. You can also learn more about assessing credit risks of municipal bonds in this SEC investor bulletin.
Source of repayment: The source of repayment is an important factor to consider when assessing the credit quality of a bond. A general obligation bond is paid through any revenues the state or local government receives. In most cases, general obligation bonds represent a promise by the issuer to levy enough taxes to make full and timely payments to investors. With revenue bonds, the interest and principal are dependent on the revenues paid by users of a facility or service, or other dedicated revenues including those from special taxes. In general, the consumer spending that provides the funding or income stream for revenue bond issuers may be more vulnerable to changes in consumer tastes or a general economic downturn than the income stream for general obligation bond issuers.
Conduit revenue bonds: In some cases, municipal revenue bonds are issued by a governmental agency issuer ("conduit issuer") acting as a conduit for a third-party ("conduit borrower"). The conduit borrower is typically a public purpose or not-for-profit entity that will use the funds for purposes that the issuer views as furthering the public interest. Conduit bonds may be issued for projects such as universities, not-for-profit hospitals, airports and student loan programs. Most conduit bonds are solely payable from funds of the underlying conduit borrower and the conduit issuer generally is not obligated to use any other source to repay the bonds if the underlying conduit borrower fails to make loan repayments. Thus, unless the official statement explicitly states otherwise, investors in conduit bonds should not view the governmental agency issuer as a guarantor on conduit bonds.
Liquidity: The vast majority of municipal bonds are not traded on a regular basis; therefore the market for a specific municipal bond may not be particularly liquid. This can be attributed to the large number of municipal issuers and variety of securities. With limited exceptions for some large, more actively traded issues, the chances of finding a specific municipal bond in the secondary market at any given time are relatively small. According to the Municipal Securities Rulemaking Board (MSRB), it is much more common to identify basic characteristics of a municipal bond in which an investor is investing (e.g. state, creditworthiness, maturity range, interest rate, yield, market sector, etc.) and then to make a choice from a set of municipal securities that meet those criteria. Selling prior to maturity can present a challenge for municipal bond investors due to the fragmented and thinly traded nature of the market.
Tax status: The interest generated by many municipal bonds is generally exempt from federal income taxes and, in some cases, state and local taxes for investors who own bonds issued in their state of resident. As a result, the stated interest rate may be less than that of fully taxable bonds, but they may provide greater returns after taxes are taken into account. Investors should remember that municipal bonds are not free from all tax implications. Interest income may be subject to federal and/or state alternative minimum tax.
In addition, a portion of the interest on some tax-exempt obligations earned by corporations may be included in the calculation of adjusted current earnings for purposes of the corporate federal alternative minimum tax. Interest income may also be subject to a federal branch profits tax imposed on certain foreign corporations doing business in the United States or a federal tax imposed on excess net passive income of certain S corporations.
Not all municipal bonds offer tax-exempt income. There is an entirely separate market of municipal issues that are taxable at the federal level, but still offer a state and, often, local tax exemption on interest paid to residents of the state of issuance. There is a class of these taxable municipal bonds called Build America Bonds (BABs).
Investors choosing between taxable and tax-exempt bonds should consider their income tax bracket as well as the differing earnings potential of taxable and tax-exempt bonds.
Bond insurance: The credit quality of a municipal bond can be enhanced by bond insurance, which is provided by a specialized insurance firm that guarantees, subject to the claims-paying ability of the insurer, the timely payment of principal and interest on bonds in exchange for a fee. In some cases, insured bonds may receive the same credit rating as the corporate credit rating of the insurer, which is based on the insurer's capital and ability to service its debt. In the case of insured municipal bonds, evaluating the rating of the insurer as well as the issuer is recommended for a more complete assessment of the bond's credit risk profile. The rating of the issuer is sometimes referred to as the underlying rating. In recent years, many bond insurers have become significantly weaker in their claims-paying abilities. Therefore, a bond's issuer may not be able to rely upon an insurer to make scheduled payments if the insurer experiences financial difficulties of its own.
Repudiation risk: This is the risk that the issuing state or municipality will refuse to pay on the bond. There can be no assurance that bonds validly issued will not be repudiated by the issuing state or municipality if partial or total repudiation is determined by the State or municipality to be reasonable and necessary to serve other important public purposes.
High yield (non-investment grade) corporate bonds have greater risk than investment grade corporate bonds.
Event risk: Unforeseen event(s) that adversely impact the issuer. Examples include natural or industrial accidents, takeovers, and corporate restructurings.
Equity correlation risk: The yields of non-investment grade bonds may be high because of the high degree of uncertainty in the company's ability to generate sufficient cash-flow from operations. Investors in high yield bonds may find that the value of their bonds falls along with an economic or stock market downturn.
Additional information and risks associated with fixed rate capital securities and trust preferred securities
Special event risk: Many fixed rate capital securities (FRCS) include a special event redemption option, allowing the issuer to redeem them at the liquidation value if a tax law change prevents the deductibility of payments by the issuer's parent company, or subjects the issue to taxation separate from the parent company.
Deferral risk: FRCS permit the deferral of payments without declaring default if the issuer experiences financial difficulties. Payments may be deferred or suspended for some stipulated period. If the issuer defers payments on a cumulative FRCS issue, the deferred income typically continues to accrue for tax purposes, even though the investor does not receive cash payments. Investors should consult with a tax professional regarding the tax treatment of investment income.
Maturity extension: Although most FRCS have long maturities to begin with, many come with an option for the issuer to extend the maturity date even further. Although this extension is generally limited to a maximum of 49 years, that may be beyond what many investors want. Trust Preferred Securities are similar to FRCS, but are generally longer term, with early redemption features, and quarterly fixed interest payments.
Credit and default risk: Structured products are subject to the risk of default by the issuer. Therefore, the financial condition and creditworthiness of the issuer are important considerations when assessing the ability of the issuer to meet its obligations on the structured product. If the issuer defaults or declares bankruptcy, the investor may lose all or some of the investment. In the case of FDIC-insured market-linked CDs, deposit amounts exceeding applicable FDIC coverage limits are subject to the credit risk of the issuing bank. Other limitations on FDIC coverage may apply. Structured products which are senior unsecured notes are not FDIC-insured. In the event of issuer default on a non-FDIC-insured product, repayment of principal would be subject to the issuer's restructuring and liquidation process and is in no way guaranteed.
Limited FDIC protection: For FDIC-insured market-linked CDs, FDIC coverage generally applies to the amount of invested principal only. Any appreciation relating to the linked index or benchmark is typically not FDIC-insured. If you hold more than the FDIC-insured limitations in deposits with the issuing bank, you will not receive the benefit of FDIC insurance for any balance in excess of FDIC limits. In this instance, amounts in excess of FDIC-insured limits are subject to the credit risk of the issuing bank.
Liquidity risk: Structured products are intended to be held until maturity. Due to a limited secondary market, it may not be possible to sell a structured product prior to maturity. Additionally, should a secondary market exist, investors who need to sell a structured product prior to maturity may be subject to a significant loss.
Market or opportunity risk: The potential return on structured products is subject to market volatility and the risks associated with the linked index or other benchmark. The return of a structured product may be zero, or less than what could have been earned on a more traditional fixed income security.
Derivatives risk: The issuers of structured products may choose to hedge their obligations by entering into derivatives and/or trading in one or more instruments, such as options, swaps, or futures. The costs associated with such hedging activity could affect the market value of a structured product or the price at which the issuer may be willing to purchase a structured product in the secondary market.
Commodity price risk: If the investment benchmark is linked to one or more commodities, you may be subject to market volatility and risks relating to commodities. Trading in commodity futures contracts associated with an underlying commodity index is speculative and can be extremely volatile. The performance of the commodity index or basket of commodities may deviate significantly from the performance of the referenced commodity or commodities.
Currency and exchange rate risk: If the investment benchmark is linked to a foreign currency or currency basket, you may be subject to foreign currency risks. The value of foreign currencies can be highly volatile and may change based on various factors, such as changes in national debt levels and trade deficits, domestic and foreign inflation rates, domestic and foreign interest rates, and global or regional political, regulatory, economic, or financial events. Performance may deviate significantly from the performance of the referenced currencies or exchange rates.
Limits on participation and potential return or "caps": Certain structured products impose limits on return potential in the form of a "cap" or may limit your participation in the upside performance of the linked security, basket of securities, or index. In the case of a capped return, if the linked index or benchmark generates a return greater than the stated cap, investors will not receive any returns in excess of the capped return. Likewise, if the participation rate of the structured product is less than 100%, the investor will realize a return that is less than the return of the linked index or benchmark.
Taxes: Structured products may be considered contingent payment debt instruments for federal income tax purposes. This means you'll usually have to pay income taxes each year on imputed annual income even though you may not receive a cash payment until maturity. In addition, any gain realized upon the sale of these products may be treated as ordinary income. Please refer to the offering document for the specific tax treatment of a structured product and consult your tax advisor for more details.
Costs and fees: Placement fees as well as other costs will vary, and may impact secondary market prices for structured products. Investors should consider these and any other costs and fees covered in the offering document prior to investing.
Not all risks can be quantified in a bond's prospectus, offering circular, or official statement. Lawsuits or significant legal changes, unusual weather, an economic downturn, or other unanticipated events could impact the issuer's ability to meet their financial commitments.
System availability and response time is subject to market conditions.
Offering search results do not constitute a recommendation by Fidelity Brokerage Services LLC (FBS).
Prices and yields are posted prior to the assessment of the FBS concession. The FBS concession will be applied for customer review prior to placement of the order.
Bonds are made available through our affiliate National Financial Services LLC (NFS) and from various third-party providers, with FBS normally acting as riskless principal.
The offering broker, which may be our affiliate NFS, may separately mark up or mark down the price of the security and may realize a trading profit or loss on the transaction.
All purchase orders for fixed income securities are routed through NFS. As your bond order is routed, NFS may fulfill your purchase order for secondary municipal, corporate and agency bonds as principal. If NFS executes your purchase order, rather than routing it to another market, it will have determined that your order would receive price improvement compared to an execution through the secondary market. Price improvement is defined by NFS as the buy order being executed at a lower price than the ask price displayed on Fidelity.com. NFS reviewing an order is not a guarantee of either execution or price improvement. NFS may route to the originator of the offering on Fidelity.com. That offering may not be available at that time.
Due to the possibility of system outages, untimely information provided by vendors, or various other reasons, Fidelity cannot guarantee the timeliness or accuracy of prices displayed. Price is subject to change and may be affected by availability and size of order. Yields are as of standard settlement and reflect the lower of the yield to maturity or the yield to call unless otherwise noted.
Although content is continuously supplied, it is only valid as of the date published and may become unreliable because of subsequent market conditions or other reasons.
The information provided herein is general in nature and should not be considered legal or tax advice. Fidelity does not provide legal or tax advice. Consult with an attorney or tax professional regarding your specific legal or tax situation.
The fixed income inventory scatter graph is an educational tool developed by Fidelity Brokerage Services LLC and Strategic Advisers Inc., a registered investment advisor and a Fidelity Investments Company, using data from a variety of third-party sources.
Yield curves shown are calculated based on previously reported third-party closing prices and yields. They are based on a cross-section of bonds for different credit qualities but are not limited to the bonds that a user selects as part of a search. The yield curves are presented for informational purposes only. Fidelity is not responsible for the accuracy of this information.
National Financial Services
Impartial Lottery Process for Partially Called, Pre-refunded, and Defeased Securities
When a security is subject to a partial redemption, pursuant to FINRA Rule 4340, FBS's clearing firm NFS has procedures in place to conduct an impartial lottery process.
When an issuer initiates a partial call of securities, the depository holding such securities (typically, the Depository Trust Corporation, DTC) conducts an impartial computerized lottery using an incremental random number technique to determine the allocation of called securities to its participants (including NFS) for which it holds securities on deposit. Because DTC's lottery is random and impartial, in the case of a partial call, depository participants may or may not receive an allocation of called securities.
When NFS is notified that it has received an allocation of called securities, it conducts a similar computer-generated random lottery. The lottery determines the accounts that will be selected and the number of securities in those accounts that will be redeemed. Allocations are based on the number of trading units or lots that the accounts hold. The probability of any trading unit or lot held by an account being selected as called in a partial call is proportional to the total number of trading units or lots being held through NFS. Once the lottery is completed, NFS notifies correspondent firms for which it provides clearing services of the accounts that received an allocation. Securities registered in a customer's name, either in transit or held in custody, are excluded from the NFS lottery process.
In the event an issuer initiates a partial call of securities on or prior to a trade settlement date with respect to either a purchase or sale of the subject securities in a customer's account, NFS reserves the right to cancel the customer's trade. Customers are responsible for covering any outstanding short positions, as well as any other resulting costs in their account, that result from the lottery.
Through the lottery process, NFS's system identifies:
- All accounts that hold the called security
- The number of trading units or lots assigned to each account which are subject to the call
- The total par value of the called securities for each account which is derived by multiplying the number of trading units/lots by the unit size
Example (unit of trade = $25,000)
|Customer Account||Par Value||Number of Trading Units|
In brief, that allocation process involves the following steps:
- Each account gets identified with the number of trading units or lots held.
- Each trading unit or lot gets a sequential number assigned (e.g., Acct EDR-567433 would get 6 numbers assigned to it).
- A random number is generated that will result in one of these trading units/lots being the first unit/lot in the selection process.
- Thereafter, the trading units or lots participating in the allocation are based on an incremental random number technique until the number of trading units or lots allocated for NFS is exhausted.
The allocation of called securities is not made on a pro rata basis. Therefore, it is possible that a customer may receive a full or partial redemption or may not have any securities selected for redemption at all. The lottery process may leave holders with an odd-lot position in their account.
When a partial call is deemed favorable to the holders of the called security, NFS will exclude its and correspondent firms' proprietary and employee accounts from the lottery and no allocation will be made to its or correspondent firms' proprietary and employee accounts until all other customer positions in such securities have been called. Generally when a partial call is deemed unfavorable to holders of the called security, NFS will not exclude its or correspondent firms' proprietary or employee accounts from the lottery.
If the partial call is made at a price equal to or above the current market price as captured in NFS's price reporting system, NFS will generally categorize the call as one that is favorable to the holders of such security. If the partial call is made at a price that is below the current market price of the security as captured in NFS's price reporting system, NFS will generally categorize that call as one that is unfavorable to holders of the security.
Redemption features, in addition to those disclosed on the trade confirmation, may exist for certain debt securities. The existence of special mandatory redemption features, such as sinking funds provisions, may not be disclosed on a trade confirmation. It is the customer's obligation to review all disclosure documents the customer may receive, and to understand the risks of extraordinary calls or early redemptions, which may affect yield. Issuers may, from time to time, publish notices of offers to redeem callable securities within limited time, price and tender parameters. NFS is not obligated to notify customers of such published calls.
Information about whether a municipal security is callable can be accessed via the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) website: emma.msrb.org.