Fixed Income in a Financial Crisis (A): US Treasuries in November 208

Although this investment class can be considered the most conservative of the three, the low yield of government bonds in the past 10 years does not lend a comparative metric against many other investment opportunities (Jacobs, 2012). The fixed rate of these instruments allows for a guaranteed return, but should only be utilized at a point in an investing cycle when risk is higher than potential income growth. The 25% allocation that is invested in this class is positioned to provide a long term guaranteed investment, with the possible that these lower rates will not rise significantly in the next few years.

2. Jordan, Bradford D., Susan D. Jordan, and David R. Kuipers. "The Mispricing of    Callable U.S. Treasury Bonds: A Closer Look." Journal of Futures Markets 18.1 (1998): 35-51. Web.

When the contractual interest rate and the market interest rate are the same, the bonds are sold at face value. But when the contractual interest rate and the market interest rates differ then the bonds are usually sold below or above face value. If the market rate of interest is lower than the contractual interest rate then the investors will have to pay more than the face value for the bonds (premium). When a company issues 12% bonds at a time when other bonds of similar risk are paying 15%. Most investors will be more interested in buying the 12% bonds and their value will fall below their face value, which is called selling at a discount.

Interest rate risk: When the interest rate goes up, the bond price will goes down.

Bondholders face very little investment risk given UST’s high interest coverage ratio and substantial cash flows, making UST less susceptible to the risk of bankruptcy. One would be concerned about the industry’s decline and the fact that growth is driven primarily by the Price Value Market. UST is positioned as the Premium

The CAT bonds are event-linked securities that pays off on the occurrence of a defined catastrophic The risks of catastrophe are shared among investors and in return they receive a rate of investment. When certain catastrophic event occurs, such as bushfire and flood mentioned above, the investor will loss their investment and the issuer receive the money to cover their loss (Cummins 2008). The ability to access the capital markets is an advantage of the CAT bonds and the bonds are attractive to investors because of the low correlations to financial variables, hence they are valuable for diversification (Litzenberger et al., 1996). Also, Harrington and Niehaus (2003) argue that another important advantage of CAT bonds as a financing mechanism is the low corporate tax costs incurred compared to equity financing and the bonds are subject to less credit risks. However, for CAT bonds, problem exists for the difficulty in determining the price or premium, giving that information regarding catastrophic events may be insufficient in most

It is widely believed that the 2008 financial crisis finds its roots in the greed of fat cat Wall Street bankers but, in fact, the crisis finds its origins in a myriad of different inputs. Just like a financial portfolio, the 2008 financial crisis was the work of years of diversified sources. This “perfect storm” so to speak struck Wall Street in the fall of 2008 the Dow Jones

In 2006, Merrill Lynch became the lead book runner for a $5 billion convertible bond issue for MoGen, Inc. This was the single, largest convertible bond issuance in history and required a considerable amount of effort on the part of Merrill Lynch’s Equity Derivatives Group to convince MoGen’s management to choose Merrill Lynch over its competitors. The case is focused on Merrill Lynch’s choice of the conversion premium and coupon rate to propose to MoGen management. This pricing decision requires students understand the concept of valuing a convertible as the sum of a straight bond plus the conversion option. Valuing the conversion option as a call option requires the

It shows that price of bonds at a lower amount will increase the demand of those items.

The large debt sale from Actavis underscores how investors are buying up income-generating investments when yields on safe government debt remain low. Corporate bonds pay more yield than safe government debt to compensate for the greater risk that investors won’t get paid back. (Cherney, 2015)

. These five factors are most responsible for securities innovations including pay-in-kind bonds, inflation-indexed bonds, convertible and exchange bonds specifically designed to mitigate risk while controlling short sales of debt equities they were tied to, in addition to the fine-tuning of credit default swaps and interest rate swaps meant to drive down the overall costs and risk of transaction while increasing potential returns (Marquis, Cunningham, 1990). These and other innovations that occurred during the 1980s were also designed to assuage or mitigate the exceptional

The spread between swaps and bonds can be traded in many different ways. In this note we describe asset swapping methodologies in detail with particular emphasis on calculation of spreads, risks, and tracking of trades. The spread of bond yields to swaps is also commonly used to evaluate richness and cheapness of bonds of differing maturities. In markets where the analytical power of players is ever growing,

WorldCom has the option to extend its bank loan credit facility or to issue this large $6 billion in debt. It plans to use the rolling commercial paper program to pay British Telecommunications for MCI’s share purchases, and then use bond proceeds to pay off the commercial paper program. This signals that WorldCom does not need the money immediately for a single corporate purpose, and does not need the money immediately. Therefore, perhaps it makes sense for WorldCom to issue the bonds in smaller installments rather than flooding the market with $6 billion in debt all at once. The first reason for this is that, if an underwriter must first purchase the bonds before selling to investors, an underwriter may demand greater spread in order to justify taking down an entire $6 billion in debt using the bank’s capital assets. The second

This report is an analysis of a bond issued by Dynegy Inc. (DYN), an electric supply and sales company. DYN issued a 5.875% semi-annual coupon corporate bond on December 1, 2013 for face value of $10,000. The bond matures on June 1, 2023 with an initial call date on June 1, 2018 and a discounted call price of $9,455.00. Because this is a callable bond, we can expect a few possible yields from investing in this bond. The yield to maturity (YTM) was calculated to be 7.1367%. This will be the yield gained on the assumption that the bond is held to maturity from the settled date of October 23, 2014. The bond’s first yield to call (YTC) is the highest among the succeeding call dates and is calculated to be 8.369%. Despite being significantly higher than the YTM, DYN will not likely call the bond because the interest rate is expected to increase in the future; this means that DYN cannot refinance the debt with a lower rate. Even though the YTM is lower, we still found it to be relatively high after making a comparison with other bonds of similar characteristic. Continuing with the expectation of the bond not being called, we can expect the calculated duration of 6.66 years to hold true. This means that if an investment is made in this bond, you can expect to breakeven in year 6.66. This short period would be an attractive feature for an investor as the risk of loss is minimized time-wise.

When bonds are issued for more than their par value, the premium can be interpreted as an adjustment of the interest rate and transferred to the debt service fund — the fund in which resources for the payment of debt will be accumulated. Although the same interpretation can be placed upon bond discounts, there may be no funds available in the debt service