Recently sharing and discussing on the economic growth and the debt market yield spread impact recalled me some work I did in the past and its worth sharing,
The abstract was based on the evidence that yield spread can serve as a leading indicator of economic activity.It’s important to understand few basic concepts before moving forward:
YIELD SPREAD: The difference between yield of long-term debt and short-term debt instrument is known as yield spread. Higher the difference between instruments greater will be the yield spread.
For example, if the 05-year Treasury bond is at 3% and the 20-year Treasury bond is at 4%, the yield spread between the two debt instruments is 1% (4% – 3%). Continue reading “Economic Growth and Yield Spreads on Debt paper – Back to School”
This morning was comparing mutual funds for the personal investment and than thought of sharing some basic myths and facts on them.
Wealth creation over the years has changed its avenues and area of interest for the investors in India. The prototype investment where the post offices and typically the scheduled banks through savings and fixed deposits have changed and with the awareness of finance, Mutual fund has become an excellent route to create wealth for the public at large.
“Mutual fund is a pool of money is invested in accordance with the common objective stated before the investment to the investors.”
Here is the concept of mutual fund which is a suitable for the common man as it offers an opportunity to invest and diversified, professionally managed basket of securities comparatively at low-cost. Continue reading “The facts and Myths about Mutual fund”
In one of the speech by Jeremy Stein a Federal Reserve Governor brought on board just last year,received a lot of attention for its suggestion that monetary tools might be used in addressing credit market-overheating. That is an interesting argument, but I don’t want to deal with that today. Rather, I want to look at Stein’s comments on collateral transformation:
Collateral transformation is best explained with an example.
Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral mustbe “pristine”–that is, it has to be in the form of Treasury securities. Continue reading “Credit Markets – Collateral and Margin calls”
Off late most investors of below investment grade debt – be it leveraged loans or high yield bonds – are intently focused on three specific questions, two of which are fairly straight forward, while the third is more complex:
Q1. What is the state of the credit fundamentals and tangentially, what are current underwriting standards like?
A1. Solid and reasonable, respectively
Q2. What are valuations like in the market?
A2. The current and forecasted benign default environment is supportive of current valuations and spread levels; however, macro influences could lead to bouts of volatility Continue reading “Leveraged loans or High yield bonds”
Leveraged finance is funding a company or business unit with more debt than would be considered normal for that company or industry. More-than-normal debt implies that the funding is riskier, and therefore more costly, than normal borrowing. As a result, levered finance is commonly employed to achieve a specific, often temporary, objective: to make an acquisition, to effect a buy-out, to repurchase shares or fund a one-time dividend, or to invest in a self-sustaining cash-generating asset.
Although different banks mean different things when they talk about leveraged finance, it generally includes two main products – leveraged loans and high-yield bonds. Leveraged loans, which are often defined as credits priced 150 basis points or more over the London interbank offered rate, are essentially loans with a high rate of interest to reflect a higher risk posed by the borrower. High-yield or junk bonds are those that are rated below “investment grade,” i.e. less than triple-B. Continue reading “Leverage and its various forms :”