Question-136: What are the ways, by which retail investor can invest in Fixed Income securities?

Answer: Retail Investor can invest in fixed income markets using following investment vehicles

• Mutual funds
• Closed-end funds
• Unit investment trusts : In this fund manager or money manager select and manage a portfolio of fixed income securities.
• ETF’s: Fixed Income oriented ETFs.
• Brokerage Account: Retail investors can also manage a portfolio of fixed income securities through direct ownership in a brokerage account.

Question-137: What do you mean by Broker-Dealer work as a Principal Capacity for Fixed Income Securities?

Answer: It means any Broker-dealers which is acting in a principal capacity buy or sell of the bonds to retail investors use their own account, and make profit from by collecting the bid/ask spread on the transaction. To understand further, an investor “X” may wish to sell a bond from his portfolio, the broker-dealer serving as intermediary on the transaction may take the bond into its own inventory from investor “X” in hopes of selling to another investor “Y” or broker-dealer at a higher price in the future.

Question-138: What do you mean by riskless-principal transaction by broker-dealer firm in bond market?

Answer: In this case Broker-dealers acting in a riskless-principal transaction facilitate retail transactions they find a buyer or seller of a fixed income instrument prior to trade execution, profiting from the transaction by applying a markup (higher price) or markdown (lower price) of the bond for the retail investor. Consider the example, in this an investor “X” want to sell a bond from his portfolio and so sends the request to the broker-dealer for pricing. Once request received by the broker-dealer, it sends the request to other broker-dealers and, upon receiving prices for the instrument from interested parties, may provide a slightly lower price than received from other broker-dealers as a price at which the retail investor can sell the instrument. Factors affecting the amount of markup or markdown on secondary transactions include the size of the transaction and/or the maturity of the instrument.

Question-139: What is the mean by broker-dealer work as an agency Capacity?

Answer: In this case when broker-dealer work as an agency capacity, they charge retail investors commissions on secondary market transactions for both buy and sell. Broker-Dealer does not mark up or down, instead broker-dealer adds a commission for each transaction. Retail customers typically pay a price per trade or execution, which include the commission charges of the broker and dealer. These commissions charges are dropping day by day because of competition. However, retail investor has to pay taxes on the commission.

Question-140: Does duration and convexity affect the price volatility?

Answer: Yes, duration and convexity of the bond affect the bond price.