What is a Tap Stock?
A tap stock, also known as a “tap issue” or “tap security,” is a type of government bond (gilt-edged security) from an existing issuance that has not yet been fully subscribed to by investors. Governments typically issue these securities to raise funds. The distinctive characteristic of tap stocks is that they are released onto the market in stages, rather than all at once, based on predetermined market price levels.
The primary purpose of tap stocks is to control the supply of government debt in the market and influence interest rates. By releasing these bonds in a controlled manner, the issuing authorities can manage market conditions more precisely.
Types:
- Short Taps: These are tap stocks with shorter maturity periods.
- Long Taps: These are tap stocks with longer maturity periods.
Examples
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UK Government Gilt Taps: The UK government frequently utilizes tap issues for gilts to manage their borrowing needs. For instance, if the government has issued a gilt with a 10-year maturity but the entire issuance was not immediately subscribed to, they may hold back a portion of this issuance. They can release further units of this bond as tap stocks when the demand in the market increases and yields reach desired levels.
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Corporate Tap Issues: Corporations may also use the concept of tap stocks. A corporation might issue a bond but keep back some of the issuance to be released later. This can help the corporation raise funds as market conditions become favorable without launching an entirely new bond series.
Frequently Asked Questions
Q1: What are gilt-edged securities? A1: Gilt-edged securities are high-grade bonds issued by governments, known for their low risk and reliable returns. They are commonly referred to as gilts in the UK and have similar counterparts in other countries, known as treasury bonds in the US.
Q2: How do tap stocks impact interest rates? A2: By releasing tap stocks selectively, issuers can manage the supply of bonds and influence market interest rates. Releasing more tap stocks reduces bond prices, which can lead to higher yields and consequently higher interest rates.
Q3: Why would an investor buy a tap stock? A3: Investors buy tap stocks for their stability and predictable returns, especially during volatile market conditions. They offer the same benefits as the original bond issuance but are released gradually based on market demand.
Q4: How do short taps differ from long taps? A4: Short taps have a shorter duration until maturity compared to long taps. Investors might choose between them based on their specific investment horizon and risk tolerance.
Q5: Are tap stocks common outside of the UK? A5: While the term “tap stock” is more prevalent in the UK, similar practices and instruments exist in other countries under different names, such as “shelf offerings” or “reopenings.”
Related Terms
- Gilt-Edged Security: High-grade bonds issued by governments, providing low-risk investments.
- Bond Reopening: Issuing additional units of an existing bond rather than creating a new issue.
- Fixed-Income Security: Investments that provide return payments at fixed intervals, such as bonds.
- Treasury Bond: A long-term, interest-bearing bond issued by the US government.
Online References
Suggested Books for Further Studies
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“The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Treasuries, Agencies, and More” by Annette Thau:
- A comprehensive guide to understanding bonds and fixed income securities, ideal for both beginners and experienced investors.
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“Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat:
- An in-depth analysis of the fixed-income market, including valuation techniques and risk management strategies.
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“Gilt-Edged Market: Price and Yield Determination revision 1952-2002” by George Bamford:
- A focused look at the UK gilt market, offering insights into how pricing and yields are determined over time.
Accounting Basics: “Tap Stock” Fundamentals Quiz
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