An Investor's Guide to Cmos
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A Collateral Theory of Endogenous Debt Maturity
Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. A Collateral Theory of Endogenous Debt Maturity R. Matthew Darst and Ehraz Refayet 2017-057 Please cite this paper as: Darst, R. Matthew, and Ehraz Refayet (2017). \A Collateral Theory of Endogenous Debt Maturity," Finance and Economics Discussion Series 2017-057. Washington: Board of Gov- ernors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2017.057. NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS) are preliminary materials circulated to stimulate discussion and critical comment. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. References in publications to the Finance and Economics Discussion Series (other than acknowledgement) should be cleared with the author(s) to protect the tentative character of these papers. A Collateral Theory of Endogenous Debt Maturity∗ R. Matthew Darsty Ehraz Refayetz May 16, 2017 Abstract This paper studies optimal debt maturity when firms cannot issue state contingent claims and must back promises with collateral. We establish a trade- off between long-term borrowing costs and short-term rollover costs. Issuing both long- and short-term debt balances financing costs because different debt maturities allow firms to cater risky promises across time to investors most willing to hold risk. Contrary to existing theories predicated on information frictions or liquidity risk, we show that collateral is sufficient to explain the joint issuance of different types of debt: safe “money-like” debt, risky short- and long- term debt. -
Collateralized Debt Obligations – an Overview by Matthieu Royer, PRMIA NY Steering Committee Member Vice President – Portfolio Coordination, CALYON in the Americas
Collateralized Debt Obligations – an overview By Matthieu Royer, PRMIA NY Steering Committee Member Vice President – Portfolio Coordination, CALYON in the Americas What commonly is referred to as “Collateralized debt obligations” or CDOs are securitization of a pool of asset (generally non-mortgage), in other words a securitized interest. The underlying assets (a.k.a. collateral) usually comprise loans or other debt instruments. A CDO may be called a collateralized loan obligation (CLO) or collateralized bond obligation (CBO) if it holds only loans or bonds, respectively. Investors bear the “structured” credit risk of the collateral. Typically, multiple tranches (or notes) of securities are issued by the CDO, offering investors various composite of maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO's collateral otherwise underperforms/migrates/early amortize, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. This is referred to as the “Cash Flow Waterfall”. Senior and mezzanine tranches are typically rated by one or more of the rating agencies, with the former receiving ratings equivalent of “A” to “AAA” and the latter receiving ratings of “B” to “BBB”. The ratings reflect both the expected credit quality of the underlying pool of collateral as well as how much protection a given tranch is afforded by tranches that are subordinate to it (i.e. acting as credit enhancement). The sponsoring organization of the CDO establishes a special purpose vehicle to hold collateral and issue securities. -
3. VALUATION of BONDS and STOCK Investors Corporation
3. VALUATION OF BONDS AND STOCK Objectives: After reading this chapter, you should be able to: 1. Understand the role of stocks and bonds in the financial markets. 2. Calculate value of a bond and a share of stock using proper formulas. 3.1 Acquisition of Capital Corporations, big and small, need capital to do their business. The investors provide the capital to a corporation. A company may need a new factory to manufacture its products, or an airline a few more planes to expand into new territory. The firm acquires the money needed to build the factory or to buy the new planes from investors. The investors, of course, want a return on their investment. Therefore, we may visualize the relationship between the corporation and the investors as follows: Capital Investors Corporation Return on investment Fig. 3.1: The relationship between the investors and a corporation. Capital comes in two forms: debt capital and equity capital. To raise debt capital the companies sell bonds to the public, and to raise equity capital the corporation sells the stock of the company. Both stock and bonds are financial instruments and they have a certain intrinsic value. Instead of selling directly to the public, a corporation usually sells its stock and bonds through an intermediary. An investment bank acts as an agent between the corporation and the public. Also known as underwriters, they raise the capital for a firm and charge a fee for their services. The underwriters may sell $100 million worth of bonds to the public, but deliver only $95 million to the issuing corporation. -
Understanding the Z-Spread Moorad Choudhry*
Learning Curve September 2005 Understanding the Z-Spread Moorad Choudhry* © YieldCurve.com 2005 A key measure of relative value of a corporate bond is its swap spread. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk of the bond. In its simplest form, the swap spread can be measured as the difference between the yield-to-maturity of the bond and the interest rate given by a straight-line interpolation of the swap curve. In practice traders use the asset-swap spread and the Z- spread as the main measures of relative value. The government bond spread is also considered. We consider the two main spread measures in this paper. Asset-swap spread An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating-coupon will be a spread over Libor (see Choudhry et al 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk.1 Asset swaps may be transacted at par or at the bond’s market price, usually par. This means that the asset swap value is made up of the difference between the bond’s market price and par, as well as the difference between the bond coupon and the swap fixed rate. -
A Financial Glossary
A Financial Glossary By Jan Röman (2003) 1 A .......................................................................................................................................... 3 B .......................................................................................................................................... 9 C ........................................................................................................................................ 17 D ........................................................................................................................................ 33 E ........................................................................................................................................ 41 F ........................................................................................................................................ 48 G ........................................................................................................................................ 51 H ........................................................................................................................................ 52 I ......................................................................................................................................... 53 J ......................................................................................................................................... 56 K ....................................................................................................................................... -
Mortgage-Backed Securities & Collateralized Mortgage Obligations
Mortgage-backed Securities & Collateralized Mortgage Obligations: Prudent CRA INVESTMENT Opportunities by Andrew Kelman,Director, National Business Development M Securities Sales and Trading Group, Freddie Mac Mortgage-backed securities (MBS) have Here is how MBSs work. Lenders because of their stronger guarantees, become a popular vehicle for finan- originate mortgages and provide better liquidity and more favorable cial institutions looking for investment groups of similar mortgage loans to capital treatment. Accordingly, this opportunities in their communities. organizations like Freddie Mac and article will focus on agency MBSs. CRA officers and bank investment of- Fannie Mae, which then securitize The agency MBS issuer or servicer ficers appreciate the return and safety them. Originators use the cash they collects monthly payments from that MBSs provide and they are widely receive to provide additional mort- homeowners and “passes through” the available compared to other qualified gages in their communities. The re- principal and interest to investors. investments. sulting MBSs carry a guarantee of Thus, these pools are known as mort- Mortgage securities play a crucial timely payment of principal and inter- gage pass-throughs or participation role in housing finance in the U.S., est to the investor and are further certificates (PCs). Most MBSs are making financing available to home backed by the mortgaged properties backed by 30-year fixed-rate mort- buyers at lower costs and ensuring that themselves. Ginnie Mae securities are gages, but they can also be backed by funds are available throughout the backed by the full faith and credit of shorter-term fixed-rate mortgages or country. The MBS market is enormous the U.S. -
How Does the Corporate Bond Market Value Capital Investments and Accruals?
How Does the Corporate Bond Market Value Capital Investments and Accruals? Sanjeev Bhojraj Bhaskaran Swaminathan* Forthcoming in the Review of Accounting Studies Final Draft: June 2007 * Bhojraj is Assistant Professor of Accounting and Swaminathan is Partner and Director, Research at LSV Asset Management, Chicago, IL 60606. Email for Sanjeev Bhojraj: [email protected] and Bhaskaran Swaminathan: [email protected]. We thank David Brown, Joel Demski, Paul Hribar, Charles Lee, Scott Richardson, Jay Ritter, Richard Sloan and workshop participants at Cornell University, University of Florida, University of Illinois, University of Michigan, Prudential Equity Group’s 18th Annual Quantitative Research Conference, QRG Quantitative Equity Conference, the Journal of Accounting Research Conference and especially an anonymous referee for helpful comments. How Does the Corporate Bond Market Value Capital Investments and Accruals? Abstract This paper examines whether the mispricing of accruals documented in equity markets extends to bond markets. The paper finds that corporate bonds of firms with high operating accruals underperform corporate bonds of firms with low operating accruals. In the first year after portfolio formation, the underperformance is 115 basis points using an accrual measure that includes capital investments and 93 basis points using an accrual measure that is based only on working capital investments. The Sharpe ratios of the zero-investment bond accrual portfolios are comparable to those of the corresponding zero-investment stock accrual portfolios. The results are also robust to risk adjustments based on both a factor model consisting of the Fama and French (1993) stock and bond market factors and a characteristics model based on bond ratings and duration. -
Bloomberg Fixed Income Family Index Tickers
///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// FIXED INCOME BLOOMBERG FIXED INCOME FAMILY INDEX TICKERS MARKET INDEX NAME TICKER USD Investment Grade Composite Bloomberg USD Investment Grade Composite Bond Index BIG US Government Bloomberg US Government Bond Index BUSG » US Treasury Bloomberg US Treasury Bond Index BUSY » US Agency Bloomberg US Agency Bond Index BAGY USD Government Related Bloomberg USD Government Related Bond Index BGRL » Non-US Sovereign Bloomberg Non-US Sovereign Bond Index BNSO » Government Regional/Local Bloomberg Government Regional/Local Bond Index BRGL » Gov Developed Banks & Supra Bloomberg Government Developed Banks & Supranational Bond Index BDEV USD Corporate Bloomberg USD Corporate Bond Index BUSC US MBS Bloomberg US MBS Bond Index BMBS USD High Yield Corporate Bloomberg USD High Yield Corporate Bond Index BUHY USD Emerging Market Composite Bloomberg Emerging Market Composite Bond Index BEM USD Emerging Market Sovereign Bloomberg USD Emerging Market Sovereign Bond Index BEMS » USD Investment Grade Emerging Market Bloomberg USD Investment Grade Emerging Market Sovereign Bond Index BEIS Sovereign » USD High Yield Emerging Market Bloomberg USD High Yield Emerging Market Sovereign Bond Index BEHS Sovereign USD Emerging Market Corporate Bloomberg USD Emerging Market Corporate Bond Index BEMC » USD Investment Grade Emerging Market Bloomberg USD Investment Grade Emerging Market Corporate Bond Index BIEM Corporate -
Default & Returns on High Yield Corporate Bonds
Soluzioni Innovative: (Private) & Public Debt Crediamo nella supremazia della Conoscenza. Dr. Edward Altman Crediamo nelle forza delle Idee. Co-Founder & Senior Advisor Classis Capital Sim SpA Crediamo nell’Ispirazione. 1 Turin, April 12, 2017 Agenda . Current Conditions and Outlook in Global Credit Markets . Assessing the Credit Health of the Italian SME Sector . Minibond Issuers 2 Major Agencies Bond Rating Categories Moody's S&P/Fitch Aaa AAA Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 Investment BBB Baa3 Grade BBB- Ba1 High Yield BB+ Ba2 ("Junk") BB Ba3 BB- B1 B+ B2 B B3 B- High Yield Caa1 CCC+ Market Caa CCC Caa3 CCC- Ca CC C C D 3 Size Of High-Yield Bond Market 1978 – 2017 (Mid-year US$ billions) $1.800 $1,624 $1.600 Source: NYU $1.400 Salomon Center $1.200 estimates US Market using Credit $1.000 Suisse, S&P $800 and Citi data $ (Billions)$ $600 $400 $200 $- 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 1994 – 2016 (Mid-year € billions)* 500 468€ 471 Western Europe Market 418 400 370 ) 300 283 Source: Credit 200 194 Suisse Billions ( 154 € 108 100 81 61 70 89 84 81 79 80 77 0 2 5 9 14 27 45 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 *Includes non-investment grade straight corporate debt of issuers with assets located in or revenues derived from Western Europe, or the bond is denominated in a Western European currency. -
Mortgage Loans
Mortgage loans • A mortgage loan is a loan secured by the collateral of some specific real estate property which obliges the borrower to make a predetermined series of payments. • A mortgage design is a specification of the interest rate, term of the mortgage, and manner in which the borrowed funds are repaid. • Mortgage originator (original lender) can either - hold the mortgage in their portfolio - sell the mortgage to an investor or - use the mortgage as collateral for the issuance of a security (mortgage backed security). 1 Contract rate (interest rate on a mortgage loan) Contract rate is greater than the yield on a Treasury security of comparable maturity. The spread reflects • costs of servicing • costs associated with default (not eliminated despite the collateral) • poorer liquidity • uncertainty concerning the timing of the cash flow - prepayment risk that leads to reinvestment of funds at a lower interest rate. 2 Fixed rate, level payment, fully amortized mortgage • The borrower pays interest and repays principal in equal instalments over an agreed upon period of time (term of the mortgage). The frequency of payment is typically monthly. • The servicing fee is a portion of the mortgage rate. The interest rate that the investor receives is called the net coupon. Question Does a fixed-rate borrower pay a higher interest rate in order to lock-in the interest rate. Growing equity mortgages • It is a fixed-rate mortgage whose monthly mortgage payments increase over time. 3 Amortization schedule for a level-payment fixed-rate mortgage Mortgage loan: $100,000 Mortgage rate: 8.125% Monthly payment: $742.50 Term of loan: 30 years (360 months) ⎡ i(1+ i)n ⎤ monthly payment = mortgage balance ⎢ n ⎥ ⎣(1+ i) −1⎦ where i is the simple monthly interest rate. -
Monetary Policy, Loan Maturity, and Credit Availability∗
Monetary Policy, Loan Maturity, and Credit Availability∗ Lamont K. Blacka and Richard J. Rosenb aDePaul University bFederal Reserve Bank of Chicago The recent financial crisis and economic recovery have renewed interest in how monetary policy affects bank lending. Using loan-level data, we analyze the effect of monetary policy on loan originations. Our results show that tightening mone- tary policy significantly reduces the supply of commercial loans by shortening loan maturity. A 1-percentage-point increase in the federal funds rate reduces the average maturity of loan supply by 3.3 percent, contributing to an 8.2 percent decline in the steady-state loan supply at a typical bank. This channel of monetary policy affects loan supply similarly at small and large banks. Our results have interesting implications for the effects of monetary policy on bank maturity transformation and credit availability. JEL Codes: E44, E51, G21. 1. Introduction Fears of a credit crunch in the recent financial crisis led many observers to call for central banks to ease monetary policy.1 Such ∗We thank the referees, Allen Berger, Brian Bucks, John Duca, Rochelle Edge, Kim Huynh, Eric Leeper, and Greg Udell for insightful comments and presenta- tion participants at the Federal Reserve Bank of Chicago, the Federal Reserve Bank of San Francisco, and the Federal Reserve System Conference on Bank Structure and Competition as well as Christine Coyer, Crystal Cun, Sean Flynn, Shah Hussain, and Mike Mei for research assistance. The opinions expressed do not necessarily reflect those of the Federal Reserve Bank of Chicago or the Federal Reserve System. -
Chapter 3 Fixed Income Securities
Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. • Fixed-income securities. • Stocks. • Real assets (capital budgeting). Part C Determination of risk-adjusted discount rates. Part D Introduction to derivatives. Main Issues • Fixed-Income Markets • Term Structure of Interest Rates • Interest Rate Risk • Inflation Risk • Credit Risk Chapter 3 Fixed Income Securities 3-1 1 Fixed-Income Markets Definition: Fixed-income securities are financial claims with promised cash flows of fixed amount paid at fixed dates. Classification of Fixed-Income Securities: 1. Treasury Securities: • U.S. Treasury securities (bills, notes, bonds). • Bunds, JGBs, U.K. Gilts ... 2. Federal Agency Securities: • Securities issued by federal agencies (FHLB, FNMA ...). 3. Corporate Securities: • Commercial paper. • Medium-term notes (MTNs). • Corporate bonds ... 4. Municipal Securities. 5. Mortgage-Backed Securities. 6. ... Fall 2006 c J. Wang 15.401 Lecture Notes 3-2 Fixed Income Securities Chapter 3 Overview of Fixed-income Markets Composition of U.S. Debt Markets (2005) Market value % (in trillion dollars) Treasury 4.17 16.5 Corporate 4.99 19.7 Mortgage 5.92 23.4 Agency 2.60 10.3 Munies 2.23 8.8 Asset-Backed 1.96 7.7 Money Market 3.47 13.7 Total 25.33 Current Trends T. Corp. MBS Agency ABS Munies MM Total 1995 3.31 1.94 2.35 0.84 0.32 1.29 1.18 11.23 1996 3.44 2.12 2.49 0.93 0.40 1.30 1.39 12.01 1997 3.44 2.36 2.68 1.02 0.54 1.32 1.69 13.05 1998 3.34 2.71 2.96 1.30 0.73 1.40 1.98 14.42 1999 3.27 3.05 3.33 1.62 0.90 1.46 2.34 15.96 2000 2.95 3.36 3.56 1.85 1.07 1.48 2.66 16.95 2001 2.97 3.84 4.13 2.15 1.28 1.60 2.57 18.53 2002 3.20 4.09 4.70 2.29 1.54 1.73 2.55 20.15 2003 3.57 4.46 5.31 2.64 1.69 1.89 2.53 22.10 2004 3.94 3.70 5.47 2.75 1.83 2.02 2.87 23.58 2005 4.17 4.99 4.92 2.60 1.96 2.23 3.47 25.33 15.401 Lecture Notes c J.