Archive for the ‘shareholders’ Category

Payday loans – when the conflict of interests arises May 23rd, 2010

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185The purpose of creating a PQ Profile is to help benchmark Partnering Intelligence for you and your team or partners. It serves as a starting point for discussion around the Six Partnering Attributes and how you can begin to improve your partnering skills. Along the vertical axis of the PQ Profile is a scale from 1 to 6. A score for any of the six attributes below 2.5 is low; between 2.5 and 4.5 is medium; above 4.5 is high.

Based on our study population, which holds true for the general population, a difference of .4 or more between two scores indicates a statistically significant difference in the level of ability in that attribute of Partnering Intelligence. For example, if you score a 3.2 on Win-Win Orientation and your partner scores a 3.8, your partner is more likely to use a win-win style of conflict resolution than you are. The larger the gap between points on two or more profiles, the greater the opportunity for conflict.

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A more favorable environment for credit November 19th, 2009

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With the decline of default rates and credit blowups in 2003 and 2004, more and more portfolio managers have realized that the concentration on idiosyncratic risk yields unsatisfactory results in a more favorable environment for credit. Increasing allocation and spread duration may sometimes not be enough to outperform the market during a rally. The use of betas can help to correct this error. The concept originally stems from the equity markets where it is used to describe the portion of the variation in asset returns that is due to market fluctuations. In credit markets beta analysis should only be applied to credit returns, that is the part of a bond’s return that is solely due to changes of the spread versus the swap curve. For a well-diversified portfolio systematic risk, which is captured by the beta, is the major part of credit risk. On a single issuer basis, however, idiosyncratic risk prevails, especially for lower rated credits. Since market data for individual bonds contain a lot of noise, regressions to obtain betas versus the market index should also be done on the sector level. If the portfolio manager is bullish on the credit market, he will tend to overweight higher beta sectors and issuers. This methodology adds a third dimension to the process of tactical positioning, supplementing the decisions on the sector allocation and spread duration.

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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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Benefit from a steepening credit curve November 11th, 2009

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There is an alternative way to benefit from a steepening credit curve. If an investor expects issuer A’s credit curve to steepen more than implied by forward spreads and issuer B’s credit curve to flatten at the same time, he could switch from company A’s long bonds into company B’s long bonds. Whenever company B has a bond outstanding with a longer maturity than the bond that is sold, the trade can be set up on a durationneutral basis. Crabbe and Fabozzi (2002) point out that the return from this strategy over a 1-year horizon is approximately equal to

Return = spread differential – duration * change in spread differential, assuming roughly equal durations for both bonds. But it should be noted that this trade is not a pure bet on an issuer’s credit curve. Even if the credit curves behave as expected and the trade turns out to be profitable, taking another position may have been more beneficial in absolute terms and with respect to the individual credit curves of the two involved issuers. This is true, for example, if the spreads of company A and B widen significantly across their credit curves. In this case the capital loss due to the spread widening can exceed the profit of the bond swap. Being positioned at the short end of the credit curve then would have been a better strategy from an absolute return perspective.

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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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