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Articles 1 - 13 of 13
Full-Text Articles in Finance and Financial Management
China Looks To Add Credit Default Swaps, Steven D. Dolvin
China Looks To Add Credit Default Swaps, Steven D. Dolvin
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Credit Default Swaps (CDSs) enable investors to hedge the risk of bond (or other credit securities) default. Like any derivative, they essentially allow investors to transfer risk -- from hedgers to speculators (or even between hedgers or speculators with different exposures). See article here, Reuters.
David Bowie: Finance Genius?, Steven D. Dolvin
David Bowie: Finance Genius?, Steven D. Dolvin
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Famous musician David Bowie just passed away. While most people remember him for his music, he is also famous in the finance area. Bowie was among the first to offer an asset-backed security, which in his case was based on future royalties from his songs. In recognition, this type of asset is often referred to as a "Bowie-bond." See article here, Bloomberg.
Are Junk Bonds Signaling Trouble Ahead?, Steven D. Dolvin
Are Junk Bonds Signaling Trouble Ahead?, Steven D. Dolvin
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High-yield (or so-called junk) bonds are set to experience their first annual loss since the recent credit crisis. Because of the higher risk involved with these borrowers, they tend to be the first to experience trouble. Thus, many investors believe that they represent a leading indicator for overall market performance. If this is true, it could indicate trouble to come. See article here: WSJ.
Interest Rate Positioning, Steven D. Dolvin
Interest Rate Positioning, Steven D. Dolvin
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Municipal bonds are a special type of bond that are particularly attractive to wealthy investors due to the tax benefits they provide. However, like other bonds, their prices will drop if interest rates rise. With many experts expecting the Fed to raise rates, bond managers are increasing cash holdings to position themselves for the impact of the rate increase. See article here, Reuters.
Here's A Good "Tips", Steven D. Dolvin
Here's A Good "Tips", Steven D. Dolvin
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Treasury Inflation Protected Securities, or TIPS, offer investors a lower coupon rate; however, in exchange, investors receive protection against the negative impact of inflation. Higher inflation leads to a loss in purchasing power, as well as higher interest rates, which reduce bond prices. The inflation protection offered by TIPS offsets these impacts by increasing the face value (called the accrued principal) in line with inflation, meaning that periodic coupon payments rise with inflation, as does the return of principal at maturity. See this Bloomberg article for a discussion of why TIPS are back in favor.
Catastrophe Bonds, Steven D. Dolvin
Catastrophe Bonds, Steven D. Dolvin
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Bonds are typically viewed as very conservative investments with relatively simple terms. However, the industry is quite complicated and offers some higher risk securities. For example, catastrophe bonds (or "cat-bonds") have normal cash repayments to lenders, except if a pre-defined catastrophe (hurricane, wildfire, earthquake, etc.) occurs. In this event, all bond cash flows cease. For obvious reasons, these are popular among issuers in the insurance industry, and the primary buyers are hedge funds (primarily due to the higher risk/return profile such bonds offer). See a related article here, Bloomberg.
Floating Rate Notes, Steven D. Dolvin
Floating Rate Notes, Steven D. Dolvin
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As interest rates rise, bond prices fall. Given historically low interest rates, many investors are concerned about bond prices, particularly since the loose monetary policy being implemented by the Fed may trigger inflation and therefore higher future interest rates. To hedge away this interest rate risk, some investors have used inflation protected securities. The Treasury, however, just launched another alternative -- floating rate notes. The interest paid on these notes rise as market rates rise, thereby also protecting the bond's price. See article here, WSJ.
Even Adults Like "Happy Meals", Steven D. Dolvin
Even Adults Like "Happy Meals", Steven D. Dolvin
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Higher risk companies, in order to sell bonds at lower interest rates, must often attach "sweetners" to the bond offering. Historically this has included warrants or conversion options. Recently, however, some companies have offered a combination of bonds and a loan of the company's shares, a so-called "Happy Meal." The bond buyers subsequently sell the shares short. If the company fails, the investors lose on the bonds, but make a profit on the short sale. This strategy is typically employed by hedge funds. See article here, Wall Street Journal.
Municipal Bond Risk -- Detroit, Steven D. Dolvin
Municipal Bond Risk -- Detroit, Steven D. Dolvin
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Municipal bonds usually have a lower yield to maturity than comparable US Treasury bonds. While this would normally be indicative of lower risk, it is purely a function of the tax advantages they provide. However, as the recent Detroit, MI bankruptcy filing suggests, municipals do indeed carry higher risk. (See article here, Yahoo! Finance.)
Bonds = Safe Investment?, Steven D. Dolvin
Bonds = Safe Investment?, Steven D. Dolvin
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As the recent offering of bonds by Apple illustrates, bonds are subject to their own types of risk. In particular, price risk exists since prices react to changes in interest rates. As is the case with the Apple bonds, a recent rise in rates has significantly reduced the price of these bonds, leading to a capital loss for bondholders. See article here, International Finance Review.
High Yield Debt, Steven D. Dolvin
High Yield Debt, Steven D. Dolvin
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High Yield Debt is a nice way of saying "junk" debt, i.e., debt that is considered speculative grade. As you would expect, the yield on such debt, due to higher default risk, is higher than standard investment grade debt. However, with historically low interest rates, even the yields on "high yield" debt don't look so high any more. See article here, International Financing Review.
Municipal Bond Risk, Steven D. Dolvin
Municipal Bond Risk, Steven D. Dolvin
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While municipals generally carry lower yields due to their tax benefits, beware that they are more risky than comparable Treasury securities. Municipals can default since, unlike the federal government, they do not have the ability to print money. The most recent (and largest ever) city to declare bankruptcy is Stockton, CA. See the article here, Fox News.
Reputational Capital, Steven D. Dolvin
Reputational Capital, Steven D. Dolvin
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Ratings agencies are supposed to provide an independent view on a firm's (or country's) financial outlook. However, their involvement in the subprime crisis (i.e., their AAA rating on defunct MBS securities) revealed that the rating agencies are often more reactive than proactive. Thus, they seem to have lost much of their respect and influence. See article here, Breakout.