Continuing last articles about bonds, today I’d like to discuss it in more easy to understand view. Lets start it with definitions. Bond is a medium-term debt securities which are transferable long that contains a promise from the issuing party to pay compensation in the form of interest in a certain period and pay off the principal debt at a specified time to the purchaser of the bonds.
Bonds has several different types, namely as below:
1) Judging from the publishers:
a) Corporate Bonds: Bonds issued by companies, either in the form of state-owned enterprises (SOEs), or private entities.
b) Government Bonds: Bonds issued by the central government.
c) Municipal Bond: Bond issued by local governments to finance projects related to public interest (public utility).
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Posted in Finance, Investment
The collateral debt obligations (CDO) modeling framework with static spread term structures and employing copula functions is taking hold in the accounting of synthetic CDO trading profit and loss (P&L). This has been spurred by tranches on standardized credit indexes (e.g., CDX.NA.IG, CDX.NA.HY, ITRAXX Eur, etc.) that have provided a calibration target for pricing models. There are ongoing discussions on different ways of fitting prices across the capital structure (e.g., “compound correlation,” versus “base correlation”).
Less understood are hedging strategies and their cost and effectiveness, and the basic risk-reward profiles of popular CDO trading strategies and the associated capitalization needs for banks. The two main reasons for this state of affairs are:
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Posted in Finance, Investment
The credit risk associated with a default-able debt instrument can be decomposed into two components: default risk and recovery risk. The former captures the uncertainty related to a possible default while the latter reflects the uncertainty related to recovery in the case of default.
Default risk can be analyzed from various perspectives. One of these perspectives is provided by the rating approach, in which default risk is quantified by means of a credit rating. These credit ratings are assigned by rating agencies, such as Standard & Poor’s (S&P), Moody’s, and Fitch, and the ratings assigned by these agencies are widely used as default risk indicators by market participants.
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Posted in Finance, Strategy