Premium bonds

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  • This is a voluntary code which sets standards of good banking practice for financial institutions to follow when they are dealing with personal customers in the United Kingdom. It provides valuable protection for you and explains how financial institutions are expected to deal with you day-to-day and in times of financial difficulty.

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  • Premium bond A bond that is selling for more than its par value. Prepackaged bankruptcy A bankruptcy in which a debtor and its creditors pre-negotiate a plan or reorganization and then file it along with the bankruptcy petition. Prepayment speed Also called speed, the estimated rate at which mortgagors pay off their loans ahead of schedule, critical in assessing the value of mortgage pass-through securities. Prepayments Payments made in excess of scheduled mortgage principal repayments.

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  • Stability Bonds would promote efficiency in the euro-area sovereign bond market and in the broader euro-area financial system. Stability Bond issuance would offer the possibility of a large and highly liquid market, with a single benchmark yield in contrast to the current situation of many country-specific benchmarks. The liquidity and high credit quality of the Stability Bond market would deliver low benchmark yields, reflecting correspondingly low credit risk and liquidity premiums (see Box 1).

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  • In this paper, we distinguish the risk of credit spread changes, if no default occurs, and the risk of the default event itself. We use credit spread data of many different firms and historical default rates to estimate the size of the default jump risk premium, along with the risk prices of credit spread changes. We show that, in order to fully explain the size of expected excess corporate bond returns, an economically and statistically significant default jump risk premium is necessary, on top of the risk premia that are due to the risk of credit spread changes....

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  • By estimating the default jump risk premium, this paper essentially tests the assumptions underlying the conditional diversification hypothesis of JLY (2001). These authors prove that, if default jumps are conditionally independent across firms and if the economy contains an infinite number of bonds, default jump risk cannot be priced. Intuitively, in this case the default jump risk can be fully diversified. Our results indicate that default jumps are not conditionally independent across firms and/or that not enough corporate bonds are traded to fully diversify default jump risk.

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  • In total, the model can generate expected excess corporate bond returns in four ways. First, through the dependence of credit spreads (or, equivalently, default intensities) on default-free term structure factors. Second, because the risk of common or systematic changes in credit spreads across firms is priced. Third, via a risk premium on firm-specific credit spread changes, and, fourth, due to a risk premium on the default jump. 1 Empirically, we find that all these terms contribute to the expected excess corporate bond return, except for the risk of firm-specific credit spread changes.

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  • The topic of real assets is currently being intensively discussed in the media and among investors. The turbulence in the financial markets since the start of the subprime crisis in 2007, together with latent worries about inflation resulting from unorthodox financial policies, mean that investors are looking for alternatives to investments in stocks or bonds. Preservation of capital has taken on a new significance. Gold has benefitted from this in the last few years.

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  • We build a three-factor term-structure of interest rates model and use it to price corporate bonds. The first two factors allow the risk-free term structure to shift and tilt. The third factor generates a stochastic credit-risk premium. To implement the model, we apply the Peterson and Stapleton (2002) diffusion approximation methodology. The method approximates a correlated and lagged-dependent lognormal diffusion processes. We then price options on credit-sensitive bonds.

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  • When interest rates fall steadily and continuously, corporations may be able to save money by refunding their existing bond issues. According to Boyce and Kalotay [2], the accepted wisdom is to refund a bond issue when interest rates fall 1% below the coupon rate on the existing bond. However, the refunding decision is in reality a complicated one.

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  • We identify and estimate the sources of risk that cause corporate bonds to earn an excess return over default-free bonds. In particular, we estimate the risk premium associated with a default event. Default is modelled using a jump process with stochastic intensity. For a large set of firms, we model the default intensity of each firm as a function of common and firm-specific factors. In the model, corporate bond excess returns can be due to risk premia on factors driving the intensities and due to a risk premium on the default jump risk.

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  • In order to provide an estimate of the attainable gains in the liquidity premium, the Commission has conducted a statistical analysis of each issuance of sovereign bonds in the euro area after 1999. The size of the issuance is used as an approximation (as it is the most broadly available indicator even if it might underestimate the potential gain in liquidity premia) of how liquid a bond issuance is, and the coefficient in a regression determines the attainable gains from issuing bonds in higher volumes 8 .

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  • The table's second row indicates that the yield gain due to higher issuing volume would be in the range of 10 to 20 basis points for the euro area, depending on the credit rating achieved, but rather independent on whether the historical or recent market conditions were used. The corresponding gain in the yield for Germany would be around 7 basis points. The simulations demonstrate that the expected gain in the liquidity premium is rather limited and decreases for Member States that already benefit from the highest rating.

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  • The issuer sells bonds to capital market investors and the proceeds are deposited in a collateral account, in which earnings from assets are collected and from which a floating rate is payed to the SPV. The sponsor enters into a reinsurance or derivative contract with the issuer and pays him a premium. The SPV usually gives quarterly coupon payments to the investors. The premium and the investment bond proceeds that the SPV received from the collateral are a source of interest or coupons paid to investors.

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  • We provide a critical assessment of the method used by the Cleveland Fed to correct expected inflation derived from index-linked bonds for liquidity and inflation risk premia and show how their method can be adapted to account for time-varying inflation risk premia. Furthermore, we show how sensitive the Cleveland Fed approach is to different measures of the liquidity premium. In addition we propose an alternative approach to decompose the bias in inflation expectations derived from index-linked bonds using a state-space estimation.

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  • Executive summary. For the vast majority of investors in municipal bonds, mutual funds have a number of advantages over individual bond portfolios. Individual bonds do provide certain benefits compared with bond mutual funds, and these advantages revolve primarily around control issues. The price for the advantages can be thought of as a “control premium” that is paid through generally higher (or additional) transaction costs, lower liquidity, more limited return opportunities, and higher risks.

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  • For most taxable bond investors, bond mutual funds have a number of advantages over individual bond portfolios in terms of diversification, cash-flow treatment and portfolio characteristics, liquidity, and costs. Individual bonds do provide certain benefits compared with bond mutual funds, and these advantages revolve primarily around a preference for control over security-specific decisions in the portfolio.

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  • During this period of monetary uncertainty, well-secured railroad bonds promising to pay principal and interest in gold sold at a premium relative to similar currency bonds. Through 1893, this premium behaved exactly as would be expected, growing during the early 1890s as the Treasury’s gold reserve gradually shrank under pressure of its silver purchases, reaching a peak during 1893 amidst a panic, and then falling quickly to zero after President Cleveland obtained a repeal of the silver purchase legislation.

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  • When a corporation refunds a bond issue, choices have to be made between fixed-rate and floating-rate bonds based on expectations of future interest rates. Whether it is financially viable to refund a bond issue depends on many factors, including the magnitude of the decline in interest rates, the call premium, flotation costs, overlapping interest and the corporate tax rate, and all of these factors should be considered in the decision making process.

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  • Chapter 10 - Reporting and interpreting bonds. After studying this chapter, you should be able to: Describe the characteristics of bonds, report bonds payable and interest expense for bonds sold at par and analyze the times interest earned ratio, report bonds payable and interest expense for bonds sold at a discount, report bonds payable and interest expense for bonds sold at a premium, analyze the debt-to-equity ratio, report the early retirement of bonds.

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  • Since there is a premium put on specialized talents and backgrounds and the need to attract capital by performing exceptionally well, I have found that investors require relatively high minimum annual rates of returns in the 20-25% range. The risky and illiquid nature of this market make such required returns necessary. As we will show, however, the average performance in this market over the last 11 years, although good, has been considerably below the 20-25% per year range. The remainder of this chapter reports on the performance of defaulted bonds in the 1987-1998 period.

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