Archive for the ‘get out of debt’ Category

Comfort with change of loan interest rates March 21st, 2010

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Future Orientation

If you scored low in this attribute, it means that you tend to rely on past events for making decisions about future events. This is a past orientation. If you scored high, you tend to use a planning style and hold people accountable for doing what they say they’ll do. This is a future orientation. If you have a past orientation, that tends to indicate a low level of trust—since you probably don’t trust people to do anything other than what they’ve done in the past. This assumption stifles any hope that things might be different and thus reduces the possibility for change. Having a future orientation is a step toward building trust between you and your partner.

Comfort with Change

If you scored low in this attribute, you’re probably uneasy about change. You like to do things the way they’ve always been done in the past and are uncomfortable with trying new things. You may have a low ability to trust and may rely on a past orientation to make decisions. If you scored high, you probably like change—and may even embrace it.And if you are comfortable with change, you probably also have a future orientation in your decision-making style and a high
ability to trust.

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Traditional credit analysis is a bottom-up approach November 21st, 2009

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Traditional credit analysis is a bottom-up approach which focuses on the selection of companies. The credit quality/risk has to be determined and the two following questions have to be answered:

  • Is the issuer able to make the coupon payments?
  • Will the company value at maturity be large enough to pay back the principal?

During highs and lows of market cycles psychological and technical factors tend to push asset prices to extremely elevated or depressed levels. At those times it is appropriate to focus on credit fundamentals and detect companies where such moves were not justified. Credit analysis should be able to identify opportunities to add substantial yield by assuming only little higher credit risk at the same time. The following paragraphs describe a possible way of analyzing the credit risk and investing in corporate bonds.

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Sensitivity to parallel shifts of the credit curve November 17th, 2009

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While both strategies yield portfolios that have the same sensitivity to parallel shifts of the credit curve, they usually yield very different returns in real world scenarios. Not only will capital gains differ when the credit curve moves in a nonparallel way, but returns from carry differ also when the yield pickup from extending duration is not equal to the yield pickup from increasing the allocation to the sector. Of course, these presumptions are rarely met in reality. Increasing the allocation to a high beta sector like automotive usually generates more carry than extending duration. Therefore, over the long run, this strategy has proven more successful. The allocation strategy is also more intuitive with respect to the allocation of capital to different risk or spread classes.

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Shortcomings of the credit curve November 13th, 2009

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A way to avoid the shortcomings of the above-described credit curve trade are duration-neutral box trades. Essentially, the trade consists of two legs. The investor buys the long-term bond of issuer A and sells the longterm bond of issuer B. Additionally, he sells short-term bonds of the first issuer and buys short-term bonds of the second issuer. Consequently, the trade benefits from a flattening of issuer A’s credit curve and a steepening of issuer B’s credit curve. This trade, of course, can be constructed to be duration neutral. Yet, there are myriad possibilities to do this. Assuming that no borrowing and leveraging are allowed the duration of the combined trade will always lie between the durations of the second shortest and second longest bond. While the position is insensitive to changes in the yield curve, its performance in general depends not only on changes of the credit curve but also changes of the level of spreads.

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A bond swap on an issuer’s credit curve November 7th, 2009

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In most cases portfolio managers do not expect the spread change to occur that is priced in forward spreads. If this view is strong enough, and if the portfolio manager has proven his skill in predicting corporate bond spread changes, he may decide to bet against the market, in other words to take an active position with respect to the credit curve. Several different ways to implement such trades will be discussed subsequently.

The first trade is simply a bond swap on an issuer’s credit curve. If an investor expects the credit curve to flatten more than implied by forward spreads over the holding period, he may switch out of short-term bonds into longer maturities. In order to keep the duration exposure constant, a part of the proceeds of the sale of the short-term bonds would have to be kept in cash. Although this trade can be constructed to be duration-neutral, the performance over the holding period relative to the benchmark depends on changes of the shape of the yield curve. A yield curve steepening can lead to the underperformance of the long bonds even if the credit curve flattens.

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