MA 莊涵涵 Financial Management -Valuing Bonds P236

Interview with Lisa Black CFA Managing Director-Teachers Insurance and Annuity Association Fixed income funds-money market, intermediate bond, high-yield, emerging market debt, inflation-linked bond funds

Question1 When many people think about the financial markets, they picture the equity markets. How big and how active are the bond markets compare to the equity markets?

Answer1 The daily trading dollar volume of bonds is 10 times than equity markets Ex.$15 billion issue of 10-year Treasury bonds can sell in a day The market value of the Barclays Capital U.S. Universal Bond Index of dollar-denominated debt as of June 30, 2009, was$13.8 trillion, with the U.S. Aggregate Index accounting for 90% Treasuries, corporate bonds, mortgage-backed securities

Question2 How do the bond markets operate? Firms &governments turn to bond markets for fund new construction projects, finance acquisitions, corporate purposes TIAA-CREF, endowments, foundations have funds to invest Intermediaries(bankers) matching up borrowers with creditors (in terms of maturity needs and risk appetite) Bond funds typically trade from $5million to 50 million at a time

Intermediaries Investment Bankers Creditor Debtor How do the bond markets operate? Match up money Endowments Foundations Firms Governments Maturity needs Risk appetite

Question3 What drives changes in the values of Treasury bonds? Interest rate bond price The factor causes interest rate changes is investors’ expectations for inflation and economic growth If investors expected economy grow, I recession &bankruptcy of Lehman Brothers(Federal Reserve injected liquidity into system,federal fund held$785 million of Lehman) Investors sold out money market funds purchased U.S. T-bills and notes increased demand interest rate fell sharply negative yield P(5% yield to maturity) =100/1.05^30=$23.14 P(6% yield to maturity) =100/1.06^30=$17.41

Question4 What impact did the financial crisis have on the bond market? What changes do you anticipate going forward as a result?

Answer4 Governments and banks should stabilize financial institution-too big to failed Unfreeze credit markets-guarantee money fund Greater scrutiny to rating agencies and rating methodologies from investors & regulators Many borrowers could not raise debt financing during the crisis. ex. automotive industry As investors shunned even AAA-&AA-rated credits Credit spreads widened dramatically

Answer4 Not until the federal government announced programs to increase liquidity did institutional investors-only buy highest credit quality instruments. ex first mortgage bonds by utilities Investors began to focus on issuers who can weather an economic downturn-move down the credit quality chain