GCM 3 Shatz

"What role do investment banks play in raising corporate capital?"

They help structure and sell corporate bonds, either guaranteeing the sale (underwriting risk) or acting as best-effort agents.

"What is a Rule 144A security?"

A corporate bond sold only to qualified institutional buyers; less liquid and not publicly traded.

"Why do investment banks charge higher fees for underwritten bonds?"

Because they assume the risk of selling the bonds themselves.

"What is a secured bond?"

A bond backed by company assets (e.g., land, equipment) to reduce default risk.

"What is a debenture?"

An unsecured bond backed only by the company's creditworthiness.

fixed-rate bond

bonds have constant coupons;

"Callable bond

can be redeemed early by the issuer

"What is a zero-coupon bond?"

Sold below par with no periodic interest; pays full face value at maturity.

"What is a step-up bond?"

Coupon increases over time (e.g., 2% Yr1 → 3% Yr2-3).

"What is a convertible bond?"

Can be converted to equity; provides fixed-income safety + potential equity upside.

"How does bond demand affect yields?"

Price ↑ → yield ↓; high demand lowers yields.

"Investment-grade bond

AAA-BBB (less risky)

"What is a 'fallen angel'?"

A bond downgraded from investment-grade to junk status.

"How is credit spread calculated?"

= Corporate bond yield − Treasury yield.

"How does news affect credit spreads?"

Negative news → spread widens → bond price falls → yield rises.

"Which bonds are more volatile in a downturn: investment-grade or high-yield?"

High-yield (junk) bonds.

"What are the main categories of U.S. debt?"

U.S. Treasuries, Corporate Bonds, Mortgage-Backed Securities (MBS).

"Public bond

more liquid, widely traded

"What is a quote-driven (dealer) market?"

Dealers quote bid/ask prices and profit from spreads (e.g., OTC corporate bonds).

"What is an order-driven market?"

Orders matched electronically by supply/demand (e.g., NASDAQ, NYSE).

"Call market

aggregated orders executed at one price

Price Priority

Buyers offering higher prices and sellers offering lower prices get priority.

"Discriminatory pricing rule?"

Trades occur at the standing order's price on the book.

"What is the priority for order execution in a limit order book?"

Price → Time priority.

"Difference between market orders and limit orders?"

Market = execution certainty; Limit = price control.

"What is the bid price?"

Highest price a buyer will pay.

"What is the ask price?"

Lowest price a seller will accept.

"How is liquidity measured?"

Ability to trade quickly without large price impact; tight spreads → high liquidity.

"What is NBBO?"

National Best Bid & Offer - shows the best bid/ask across exchanges.

"Market order?"

Execute immediately at best price.

"Limit order?"

Execute only at limit price or better.

"Stop / Stop-Loss order?"

Converts to a market order when trigger price is hit.

"Stop-limit order?"

Trigger + limit; executes only within specified range.

"Market-if-touched (MIT)?"

Buys below/sells above market once 'touched.'

"Market Not Held?"

Broker discretion on timing/method of execution.

"Day order

expires end of day;

"Fill-or-Kill (FOK)?"

Must execute entirely immediately or cancel.

"All-or-None (AON)?"

Entire quantity must fill; can wait.

"Example of Fed rate cut?"

0.25% reduction to 3.75-4.00%.

"What is QT ending?"

Stopping balance-sheet runoff to maintain ample reserves.

"Why monitor futures market probability of Fed cuts?"

Indicates investor expectations (~62-63% chance of next cut).

"NYSE vs NASDAQ ownership?"

NYSE → ICE; NASDAQ → independent.

"Volume distribution: exchanges vs off-exchange?"

~⅔ on exchanges; ⅓ off-exchange (dark pools/internalizers).

"Circuit breakers purpose?"

Temporary halts to prevent panic during extreme drops.

"What is internalization?"

Broker fills order internally if best execution rules are met.

"Purpose of dark pools?"

Reduce market impact for large trades; private venues.

"Difference between electronic and algorithmic trading?"

Electronic = human-initiated online; Algorithmic = pre-programmed strategies.

"HFT definition?" "High-Frequency Trading -

ultra-fast execution via co-located servers.

"Purpose of Regulation NMS?"

Ensure transparency, investor protection, competition.

"Key rules of Reg NMS?"

Best execution, Access fees, Sub-penny rule (min tick $0.01), Market data rule.

"Tick size rule changes?"

Pre-decimalization = 1/8 ($0.125), now 1 cent; small-cap pilot failed.

"What is the maker-taker model?"

Maker posts limit orders → earns rebate; Taker executes market orders → pays fee.

"Concern with maker-taker?"

Brokers might route customer orders not to the best price, but to the exchange that gives the broker the highest rebate.

"What is payment for order flow (PFOF)?"

Brokers receive payment for routing retail orders (legal if disclosed).

"What happened during the flash crash?"

5% drop in ~12 minutes, full recovery.

"Causes of the flash crash?"

Algorithmic selling, liquidity withdrawal, stub quotes.

"Response to flash crash?"

Circuit breakers halted trading.

"Spoofing?"

Fake orders to mislead market (illegal).

"Layering?"

Fake orders at multiple price levels to intimidate others.

"Painting the tape?"

Artificial trading to create activity; legal/illegal depending on intent.

"Wash trading?"

Trader buys and sells with self to create volume; often illegal.

"Key takeaways from market manipulation?"

Decimalization improved efficiency; maker-taker & PFOF incentivize liquidity; flash crashes show algorithmic risks; manipulative practices are illegal; regulations/circuit breakers mitigate risks.

Uniform pricing:

All trades execute at the same single price, usually the clearing price.

floating-rate bonds

coupons vary with a benchmark.

non-callable bonds

cant be redeemed early by the issuer

high-yield bonds

BB+ and below (riskier, more volatile).

private corporate bonds

144A = restricted to qualified buyers, less liquid.

continuous market

orders matched throughout the day.

time priority

earlier orders fill if prices equal.

GTC orders

active until filled/cancelled.