Archive for the ‘international markets’ Category

Gain debt independence with secure financial control April 22nd, 2010

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If you scored low in this attribute, you probably tend to be a highly independent person.While this is a valuable trait in many cases, it can be destructive in a partnership. Have you ever worked on a project and had someone go off on a tangent, leaving the rest of the team lost and bewildered? Genius, of course, often requires independent thinking.

But in partnerships, success comes from planning with others and then performing according to plan. If you’re uncomfortable relying on others for your success, you’ll have a difficult time being in partnership with others. People who are highly independent also tend to have a low ability to trust and feel uncomfortable about selfdisclosure, feedback, and change they cannot exclusively control. If you ranked high in this attribute, you probably are comfortable being interdependent and working in partnership. You may also have a high ability to trust and comfort with self-disclosure and feedback.

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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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Credit curves of two issuers will converge November 15th, 2009

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If an investor only has a view that the credit curves of two issuers will converge, but is not sure whether this will happen at wider or tighter spread levels, he would like to construct the box trade in a way that makes it insensitive to parallel shifts of the credit curves. In order to achieve this goal the trade has to be proceeds neutral. It is worth noting that the spread-neutral box trade is almost independent of the spreads, except for the minor impact of spreads on duration.

Remember that this trade is designed to protect investors from spread changes that might adversely impact their credit curve trade. Yet, often portfolio managers not only have a view on the relative changes of the credit curve of the two issuers but also on the direction of spreads. In this case the spread-neutral box trade is not optimal. The investor would rather choose a longer or shorter duration, depending on his view on the direction 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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The holding period return of a loan November 3rd, 2009

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Similar analyses as for government yield curves can be done for corporate bond yield curves. The holding period return of a corporate bond is composed of the coupon income, the price change due to the change in the underlying government bond yield, and the price change due to the spread change. As pointed out before, corporate bond investors tend to take only small active positions with respect to the yield curve. They rather manage their credit curve exposure actively. Therefore, they are most interested in the analysis of the last component, price changes due to changes in spreads.

If one assumes that the government yields move to their forward rates, holding period returns of a company’s bonds with different maturities are not affected by the performance of the government bond market. As a consequence corporate bond returns in this case only depend on initial spreads and spread changes over the holding period. The forward spread curve then reflects the break-even spreads, that is the spreads that have to be observed at the end of the holding period in order that all bonds along the credit spread curve achieve the same return.

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