Legal Definitions - bought and sold notes

Bought and sold notes are formal written confirmations issued by a broker after they have facilitated the sale of a financial instrument, such as a bond, a promissory note, or another debt security. These documents serve as official records of the transaction details for both the buyer and the seller.

Specifically, the broker provides a bought note to the party who purchased the financial instrument, confirming their acquisition. Conversely, the broker sends a sold note to the party who sold the financial instrument, confirming their divestment. Both notes contain essential information about the transaction, including the type of instrument, quantity, price, date, and other relevant terms.

Here are a few examples to illustrate this concept:

• Corporate Bond Transaction: Imagine a financial advisor, acting as a broker, helps one client sell a block of corporate bonds issued by "Tech Innovations Inc." and simultaneously helps another client purchase those very same bonds. After the transaction is executed, the advisor would send a sold note to the client who divested the bonds, detailing the specific bonds sold, the selling price, and the date of the sale. To the client who acquired the bonds, the advisor would issue a bought note, confirming the purchase of the Tech Innovations Inc. bonds, the price paid, and the transaction date. These notes provide clear, documented proof of the trade for both parties' records.

• Private Placement of a Promissory Note: Consider a startup company, "Green Energy Solutions," that needs to raise capital for expansion. They decide to issue a promissory note directly to a private investor, "Mr. Henderson," rather than through public markets. A specialized financial broker facilitates this private placement, connecting the company with Mr. Henderson and structuring the terms of the note. Once the agreement is finalized and funds are exchanged, the broker would prepare a sold note for Green Energy Solutions, confirming their issuance (sale) of the promissory note. Simultaneously, the broker would provide a bought note to Mr. Henderson, confirming his acquisition (purchase) of the promissory note, outlining its principal amount, interest rate, and maturity date. This ensures both the issuer and the investor have official documentation of the private debt transaction.

• Government Securities Trade: A large pension fund decides to rebalance its portfolio by selling a significant amount of U.S. Treasury Notes and buying an equivalent amount of municipal bonds. They engage a bond broker to execute these complex trades in the market. When the broker successfully sells the Treasury Notes, they will send a sold note to the pension fund, detailing the specific series of Treasury Notes, the quantity, the price achieved, and the settlement date. When the broker then purchases the municipal bonds on behalf of the pension fund, they will issue a separate bought note, confirming the acquisition of the municipal bonds, including their issuer, coupon rate, and purchase price. These notes are critical for the pension fund's compliance, accounting, and audit trails.