Understanding the Hidden World of Bond Derivatives
Bond derivatives such as futures and options offer tremendous returns, but carry sizable risk. Here's where to learn the difference between a bond put and a bond call, where to trade bond futures, and whether derivatives are for you. We'll also look at some of the more exotic offerings in the debt markets, including collateralized debt obligations and asset-backed securities such as Bowie bonds.
What is a Covered Bond? Looking at the Newest Investment in U.S. Bond Markets
The newest addition to the U.S. bond market is a staple of the European debt markets. Covered bonds are similar to the asset-backed securities that led to the credit crisis, but they're supposed to be much safer. But just what, exactly, is a covered bond? And should you buy one?
The newest addition to the U.S. bond market is a staple of the European debt markets. Covered bonds are similar to the asset-backed securities that led to the credit crisis, but they're supposed to be much safer. But just what, exactly, is a covered bond? And should you buy one?
Collateralized Debt Obligations (CDOs) and the Start of the Credit Crisis
Somewhere in early 2007, one of the more complex and controversial corners of the bond world began to unravel. By March of that year, losses in the collateralized debt obligations (CDOs) market were spreading -- crushing high-risk hedge funds and spreading fear through the fixed-income world. The credit crisis had begun.
Somewhere in early 2007, one of the more complex and controversial corners of the bond world began to unravel. By March of that year, losses in the collateralized debt obligations (CDOs) market were spreading -- crushing high-risk hedge funds and spreading fear through the fixed-income world. The credit crisis had begun.
What is a Credit Default Swap?
Credit default swaps are the most common form of derivative in the fixed-income market. The swaps are complex investment vehicles that can be used to protect a bond buyer from the risk of default.
Credit default swaps are the most common form of derivative in the fixed-income market. The swaps are complex investment vehicles that can be used to protect a bond buyer from the risk of default.
What are Zero-Coupon Bonds and "Strips"?
Zero-Coupon Bonds are sold at a deep discount to their face value. In many cases, interest is compounded and paid at maturity rather than during the life of the bond. In other cases, a financial institution "strips" the interest payment from a fixed-income investment and resells it as a zero coupon.
Zero-Coupon Bonds are sold at a deep discount to their face value. In many cases, interest is compounded and paid at maturity rather than during the life of the bond. In other cases, a financial institution "strips" the interest payment from a fixed-income investment and resells it as a zero coupon.
What Are Mortgage-Backed Securities?
Until the mortgage-backed securities market began to collapse, eventually leading to the near collapse and eventual sale of bond-trading king Bear Stearns, most of the world had never heard of this particular derivative investment. About's guide to Investing for Beginners offers a description of the controversial investment.
Until the mortgage-backed securities market began to collapse, eventually leading to the near collapse and eventual sale of bond-trading king Bear Stearns, most of the world had never heard of this particular derivative investment. About's guide to Investing for Beginners offers a description of the controversial investment.
Where Can I Buy a Bowie Bond?
Back in 1997, an investment banker named David Pullman created a series of bonds backed by the royalties on music owned by rock star David Bowie. The deal captured the imagination of Wall Street, which has since issued dozens of other bonds that "securitize" intellectual property. The deal also left thousands of fans wondering: Where can I buy a Bowie Bond?
Back in 1997, an investment banker named David Pullman created a series of bonds backed by the royalties on music owned by rock star David Bowie. The deal captured the imagination of Wall Street, which has since issued dozens of other bonds that "securitize" intellectual property. The deal also left thousands of fans wondering: Where can I buy a Bowie Bond?
What are Auction Rate Securities?
An Auction Rate Security, or ARS, is a complicated debt instrument in which interest rates are reset on a regular basis through a Dutch Auction. The ARS market has high minimum investment requirements -- and that turned out to be a good thing for average investors. In early 2008, the ARS market collapsed -- leaving institutional investors and wealthy people holding the bag.
An Auction Rate Security, or ARS, is a complicated debt instrument in which interest rates are reset on a regular basis through a Dutch Auction. The ARS market has high minimum investment requirements -- and that turned out to be a good thing for average investors. In early 2008, the ARS market collapsed -- leaving institutional investors and wealthy people holding the bag.
Derivatives: The Only Way to Win is Not to Play
If I could offer one piece of advice to anyone who has the opportunity to buy a derivatives investment it would be this -- don't. There's probably never been a market in the history of money that is more complex and more skewed toward the sellers. Check out this post on Seeking Alpha.
If I could offer one piece of advice to anyone who has the opportunity to buy a derivatives investment it would be this -- don't. There's probably never been a market in the history of money that is more complex and more skewed toward the sellers. Check out this post on Seeking Alpha.