3 min readOn the day Merck announced the withdrawal of its arthritis drug Vioxx, its stock price closed down 27% from the previous day. By the time Moody’s downgraded Merck’s debt to Aa2 40 days later, the formerly AAA-rated company had lost 42%, or $58 billion of its equity value. Is it time for investors of short-duration…
2 min readIntroduction Corporate treasurers frequently make investment decisions based on debt ratings from nationally recognized statistical rating agencies, namely Moody’s, Standard & Poor’s, and Fitch. This article addresses the credit risks of Auction Rate Securities (ARS) that are not adequately addressed by long-term credit ratings alone in short-term investment selections. Long-Term Ratings Do Not address Short-Term…
2 min readThere are several portfolio management techniques available to help diminish the risk presented by higher interest rates. If fact, when managing portfolio duration, yield curve positioning and security selection properly, rising interest rates can add value, particularly for short duration or held-to-maturity portfolios. Duration Management Though it is extremely difficult to predict with precision how…
1 min readWhat is a Make-Whole Call? A make-whole call is a type of call provision in a bond allowing the borrower to pay off remaining debt early. The borrower has to make a lump sum payment to the holder derived from an earlier agreed upon formula based on the net present value (NPV) of future coupon…
3 min readLast April, when Google Inc. unveiled its plan to use a Dutch style auction in its initial public offering, it brought the popularity of this peculiar way of setting securities prices to a new height. Meanwhile, a sea change has been taking place for several years that promises to redefine how debt issuers tap the…
2 min readExecutive Summary A portfolio of laddered maturities may have better yield advantage over money market funds in a rising rate environment. Market Cycle Comparison Since 1993, the average net-of-fees yield advantage of 1-year A-rated corporate bonds over the Lipper institutional Money Market Average was 86 basis points annually. In the rising rate environment of 1994,…
3 min readWhat is 4(2) Commercial Paper? Commercial Paper is a short-term unsecured promissory note to repay a fixed amount on a certain future date. The product is exempt from SEC registration according to one of the following sections of the Securities Act of 1933: 3(a)(3), 4(2), and 3(a)2. Today, the US commercial paper market is the…
2 min readIntroduction Broker-dealers market Auction Rate Securities (ARS) to corporate clients as yieldier alternative investments to high-quality cash management vehicles. While the securities’ yield advantage over very short-duration (generally 28 or 35 days) bonds is possible, the brokers often fail to point out the price an investor pays in terms of liquidity given up, opportunities lost…