"04-02Fun Facts (Fixed Income)

"04-02Fun Facts (Fixed Income) - INVESTGR...

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Unformatted text preview: INVESTGR Facts .flMEEEIELHhME JUNE—Jeni: = heads are lewlteted tieiit securitie's'th'at learnt a relatiliiehr '_ - high '_risl: of detauietquid_etpee_ tci timi'a hunch refine-name j“ '- ' . weenie-t. issuing ‘7th ' 3' .. ..: hands," hutth at-‘s'hqtialwatls: ' 1he-ease-Here'se'list'et settle at - itiefamiliar_-e'ijn'1pa hije'a wheae j‘ i Weyerheeitser{BER-l" - ... Liitthansal'r'ated Bat] " . .ufliaihmflm. . .. tradesmen”: ' ' Semehfalflafll _' - These 'eempa nies are still _ promptly aewieingthair deht'“ - -- The reason they‘ve been slapped] ' With liter-ratings is thettheir " aperating earnings la'eltthe' '. _ualittrand-censistensy-athigh- .. ' grade bends. Wits invest in these bands“? For their high returnsl' ' ' i‘t‘lARKE‘I‘ IN CRISIS Rating Agencies Miss a Big One Mortgage-hacked seeurities, essentially debt instruments with returns that depended upon payments on an underlying pool of residential real estate mortgages, played a central role in the financial crisis that began in 200? and the recess- sion that followed. Moody's and Standard 8: Poor’s provided ratings can these instruments, inst as they did with serous-rate bonds. Hating these securities was much more complex than rating corporate bonds for a variety of reasons, among them the feet that rating agencies knew relatively little % ____ ..,, INVESTOR FACTS- 'PlflflES.Efl_lJfl-PHIEEE_EII ' BWH#We'all knew fltet~ '_' ' when. market rates: lie-hurl . rieaa gadmwlandeiee- .. . _ '_erssl:But bend ptieesdeh't - . '. meterin- entl dawn-at the sente- ' speed, because the-strident _ mereinastreightline.Hathee g:_.the reletienship heavean : ' ' n'ia l‘ltEt yields and hentl arises - ' is'tienmt; meening bentl prisesr ' ;;5:"' will rise el: an increasing rate ’__' . _ mentieldstall ant-tees at. . decreasineratswhen this; ' 5' nee-That is,.htindpriees eases teeter dish-thejrgedateaiThi_s'_ _. -I_: islhnewn as positive-eartth - 5" anti it’s alpreperttr efall .I - nen‘eallahlehends. Thusnfor a '. ' . given-change inftrield. tau-stand ' . tti make more meltetr'etheti ' ' ' prises ge upthah 1"rau'll-iese _ is «when prices l'l‘ttl'lI'E down! . - . ...-' about the oreditworlhiness of the individual home. owners whose mortgages were in the puolThe rating agencies gave rnan‘,‘ mortgage backed securities investment grade ratings, and these ratings prompted investors of all kinds, including large financial institutions, to pour money into those assets. As real estate prices began to decline! the values of "toxic" mortgage—backed securities plummetedi'l'hat led to the failure of Lehman Brothers and bailouts of other large financial institutions, ..m .u...Mac;aggn~iezJ-imu.'.~mu.:m .w i‘i‘lARKE' S in CRISIS Implicit Guarantee Becomes Explicit Debt securities issued by agencies such as the notes. and bonds are. in 200?. as residential mart- Federal National Mortgage Association lFannie Mae] gage defaults began to rise, Fannie Mae and Freddie and the Federal Home Loan Mortgage Corps-ration Mae came under severe financial distress. 0n {Freddie Mac} have generally had an implicit gu are n- September it 2003. the federal government affec- tee from the federal government. meaning that tively tonic over these institutions, injecting $100 bil- investors believed that the government would not lion ufnew capital into each to stabilize them and to allew'a default on any at these instruments even if reassure investors that these giants of the mortgage they were not "officially" badred by the full faith and industryr who held or guaranteed about $5.5 trillion credit of the US. government as Treasury bills, in residential mortgage delrut.r would not disappear. "'Isiilasrsn Escrs' ’ :. WHERE"! Bill'llls. Emit -' ; '_ flliflfiIlflHHfi-i‘nsfimeswfl ‘ ' ' .rasllifpan‘t-jtidgs‘a Emir—ctr ' ' lurinrir far that matterth its: . -- . . swat Heresretliree bends. .; mater! thiamine; appear inf : hetatslllrdiffarent ' '. e .er Bight-FEEDIBWTGDUFUH . . . ._ .iiunil priests: yield flit.- - _ _- A iivysardifiii hand that ;_ _. ' _. '_ trsdesetayieldeitiiii; .'- sh. lfl_-.lr&arr.lli-5ili bend, . ;. Sufism view i’a'ii- ' -- - .. - Nihsughthsse three bands -_ Itsiis difierent'eeu'pans'sntlj _ ' .__-d_ifmre_nt mamritiesnher have _ _ _ i : sue-thing in cammnn: The; all _ _ . have sentiments? sisiiht-e :easiest-lilting:rats ' witntup-sriii-‘Mll by Ellie 1|J|Il __ g basis-paints,_tha market mites. :5; - :"_etfl1ese'ltends'wquid all ': I '-: believe prettyr mush die Earns! . ~I ...
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This note was uploaded on 04/09/2011 for the course MGMT 411 taught by Professor Clarke during the Winter '09 term at Purdue.

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"04-02Fun Facts (Fixed Income) - INVESTGR...

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