The Management of Bond Investments and Trading of Debt

The Management of Bond Investments and Trading of Debt

Dimitris N. Chorafas

Language: English

Pages: 377

ISBN: 0080973108

Format: PDF / Kindle (mobi) / ePub


Written for managers and professionals in business and industry, and using a minimum of mathematical language, The Management of Bond Investments and the Trading of Debt addresses three key issues:
• Bondholder's options, risks and rewards in making investments in debt instruments;
• The dynamics of inflation, and how they affect both trading in the bond market, and investment decisions;
• The democratization of lending, socialization of risk, and effect of the global economy on the bond market.

Financial expert Dimitris Chorafas discusses these issues in straightforward language for managers and professionals in commercial banks, securities houses, financial services companies, merchandising firms, manufacturing companies, and consulting firms, placing the mathematical treatment of the issues in the appendices, available for study but not necessary for understanding the business issues addressed in the book:
• Focuses on new issues of central importance in bond and debt trading today
• Uses clear, straightforward language for managers and professionals in business and industry, with mathematical treatment provided in appendices
• Thorough treatment of operational risk new to books on this topic

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Management of Bond Investments and Trading of Debt JUST NOTE DIFFERENCE SPECIAL PROVISIONS 1994 1995 1996 1997 1998 1999 2000 2001 2002 Figure 2.6 A money center bank’s charges for bad and doubtful debts: capital at risk skyrockets when the market goes into a tailspin ᭿ ᭿ Hedge funds and several banks nowadays try to reinvent mercantilism through alternative investments.8 This is, however, the wrong attitude, one which can damage an institution’s reputation and lead straight into

exchange trading than there was actual foreign trade. But after President Nixon took the dollar off the gold standard, in August 1971, foreign exchange trading increased eight-fold in just three years, to around $100 billion a day. Correspondingly, in the decade from 1971 to 1981, foreign exchange turnover increased four times faster than the increase in the value of world trade, leaving the share of international commerce in the dust. The Federal Reserve was the first to attempt to measure the

changes in equity markets and debt markets. A legitimate question is: since international commerce and foreign exchange operations have been decoupled, which is the driving force pushing the latter to aforementioned heights? The answer consists of three points which, a priori, correlate among themselves: ᭿ ᭿ ᭿ Cross-border direct investments Investments in securities (bonds and stocks), and Speculative cross-border money movements, including derivatives products. Currency plays a crucial role

relatively simple. Today, there are scores of basic, hybrid, and derivative debt instruments masquerading as ‘bonds’, as well as simple bonds from frail issuers. As a result, the act of investing in them faces many pitfalls. Those investors keep ahead of the curve, who: ᭿ ᭿ ᭿ Do their homework Subject all claims to rigorous research, and Exercise great care in making bond choices. Choosing bonds 97 Beyond the message carried by these three points, the investor should be asking: ‘Are my

represent an entity’s current financial situation. Another important leverage ratio is that of debt service coverage. It is computed as earnings before interest and taxes (EBIT) over interest due (EBIT/interest due) and is considered to be quite predictive. As such, it is a good tool in discriminating between lower and higher gearing exposure – and therefore credit risk. The downside is that EBIT is proforma financial reporting, and proforma is often synonymous with ‘cooking the books’.9

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