Private Bond Research Articles

Équilibre financier entre les États-Unis et le Japon : un modèle de choix de portefeuille à deux pays pour analyser les évolutions récentes

Nous construisons un modèle simple d''équilibre de portefeuille entre les Etats-Unis et le Japon pour analyser les conséquences des évolutions financières récentes dans ces deux pays : politique monétaire et politique budgétaire très expansionnistes au Japon ; substitution de la dette privée à la dette publique avec déficit extérieur aux États-Unis. Nous comparons les prédictions du modèle aux faits observés concernant les taux d''intérêt, le taux de change, les spreads de taux entre titres privés et publics et examinons, à la lumière du modèle, les développements récents des politiques économiques menées au Japon et des mécanismes financiers dans les deux pays.

TIME‐VARYING ESTIMATES ON THE OPENNESS OF CAPITAL ACCOUNTS IN EAST ASIA AND MEXICO

HE Asian currency crisis of 1997 and its reverberations in financial markets of developing countries around the world have intensified the debate over regulating the movement of capital, as capital flows to developing countries have grown rapidly since the early 1990s. One main feature of recent capital flows to developing countries is that private (bond and equity) flows, as opposed to official flows, have become a crucial source for financing large current account imbalances. The evolution and magnitude of capital movements have presented both opportunities and challenges to the developing countries. The degree of capital mobility has typically been assessed by the extent to which expected returns are equalized between domestic and foreign assets of the same type. The equalization of returns can be measured by simple interest arbitrage which typically focuses on the short-run relationship between capital flows and interest differentials. Capital mobility is defined as the absence of barriers to the movement of short-term capital across national boundaries. We can examine covered interest differentials for only a subset of countries with relatively well-developed forward markets, and many papers have looked at the mobility of financial capital for industrial countries. 1 Unfortunately, for a majority of countries that are liberalizing or contemplating liberalization, forward markets are either extremely thin or nonexistent, rendering covered interest parity tests irrelevant and making it difficult to judge the economic impact of capital account liberalization. Therefore, tests of uncovered interest parity conditions have been applied to examine the degree of capital mobility in most developing countries, although there is little evidence to show that uncovered interest parity conditions hold. This paper examines interest rate determination in two polar cases related to the degree of openness of the economy. If the economy under consideration is one that

The Effect of Taxes on Corporate Debt Maturity Decisions: An Analysis of Public and Private Bond Offerings

This paper tests theoretical predictions of a relation between taxes and corporate debt maturity decisions using bond offerings (public and private) during 1988–1995. Consistent with predictions of a tax clientele effect, a positive relation between firms' marginal tax rates and the maturity term of their corporate bond offerings is found. Also consistent with tax predictions of a term structure effect, the results indicate that firms issue corporate bonds with longer maturities in periods characterized by large term premiums (for long- vs. short-term interest rates). In periods with large term premiums, long-term bonds accelerate interest deductions into the early years of the bond obligation (with the present value of pre-tax interest payments being no more for the long-term bond than for successive short-term bond issues). These findings extend prior research on determinants of financing choices by providing some of the first empirical evidence that taxes are related to corporate debt maturity decisions.

The Private Equity Market: An Overveiw

The private equity market is an important source of funds for start‐up firms, private middle‐market firms, firms in financial distress, and public firms seeking buyout financing. Over the past fifteen years it has been the fastest growing corporate finance market, by an order of magnitude over the public equity and public and private bond markets. Despite its dramatic growth and increased significance for corporate finance, the private equity market has received little attention. This study examines the economic foundations of the private equity market, analyzes its development and current role in corporate finance, and describes the market's institutional structure. It examines the reasons or the market's explosive growth over the past fifteen years and highlights the main characteristics of that growth. It provides data on returns to private equity investors and analyzes the major secular and cyclical influences on returns. It describes the important investors, intermediaries, issuers, and agents in the market and their interactions with each other. Drawing on data from trade journals, the study also estimates the market's size as of year‐end 1995.

The only good woman, isn't a woman at all: The Crying Game and the politics of misogyny

Abstract Drawing on the existing canon of Western political thought, The Crying Game uses and reinforces many of the age-old expectations about female political behaviour. Women have been viewed as too emotional and connected to the private sphere to successfully negotiate in the public realm of politics. Dil and Jude offer examples of how women should and should not behave in the political world, particularly in regards to the use of violence. Though Jordan expresses much doubt about the public bonds of soldiers and instead uses the film to reaffirm the value of private bonds, he does so in a misogynist manner. The transvestite offers the best chance of bonding and a happy future; there is neither with the woman. As such, The Crying Game is misogynistic in its reliance of the age-old definition of female political behaviour and by even denying a role for women in the private sphere.

An Overview of Private-Sector Financing of Urban Infrastructure Services: A Developing Countries Perspective

Although most private-sector financing activity takes place in developed countries, attention is quickly shifting to less developed countries, where enormous infrastructure deficiencies, rapid urbanization, and limited public-sector resources are forcing governments to consider alternatives to the traditional public provision of infrastructure services. This article provides an overview of the principal methods used by central and local governments to foster the private provision and financing of urban infrastructure services. The techniques include land privatization; development exactions; special assessment and benefit assessment districts; certificates of participation; private contracting of services; leases and concessions; build, operate, and transfer (BOT) projects; public-private partnerships; the privatization of services; commercial bank financing; infrastructure funds; and private bond financing. Each section describes the technique, provides examples of where it is used, and discusses key implementation issues.

Private Bond Restructurings: Lessons for the Case of Sovereign Debtors

This paper reviews recent experience with both sovereign and private bond restructurings. It also summarizes the literature on private bond restructurings and describes the “typical” process for a voluntary exchange of new bonds for existing obligations. From this information some conclusions are drawn as to the possibility of concluding voluntary restructuring agreements for sovereign bonds within relatively short periods of time.

Private Bond Restructurings: Lessons for the Case of Sovereign Debtors

Private Bond Restructurings: Lessons for the Case of Sovereign Debtors

The Effectiveness of Debt Insurance as a Valid Signal of Bond Quality

The Effectiveness of Debt Insurance As a Valid Signal of Bond Quality The role of private bond insurance in financial markets has generated considerable research (see Cole and Officer, 1981; Braswell, Nosari and Browning, 1982; and Kidwell, Sorensen and Wachowicz, 1987). Previous work focuses mainly on the benefits of insurance to borrowers. This third-party credit enhancement improves the quality of a debt issue and increases its marketability, thereby reducing the borrower's interest cost. However, outside credit assistance is not free. Any interest cost savings due to the purchase of bond insurance must be weighed against the out-of-pocket premium expenses incurred by borrowers. Unfortunately, available empirical studies provide no conclusive evidence as to the net effect of purchasing insurance on bond interest cost. On the one hand, Braswell, Nosari, and Browning (1982) find little or no net benefit to borrowers who use bond insurance. Cole and Officer (1981), on the other hand, report significant net interest cost savings to borrowers as a result of purchasing bond insurance. While the answer to the question of whether a net insurance benefit exist for bond issuers still awaits further empirical investigation, a more fundamental issue deserves attention; What theoretical basis supports the existence of bond insurance? In other words, what induces bond issuers or investment bankers to continue buying debt insurance? In an efficient and competitive market, the premium charged by the insurer should exactly offset any potential interest savings to borrowers from the purcahse of bond insurance. Consequently, no excess or net benefits should exist for borrowers purchasing bond insurance. Thakor (1982) argues that even in an efficient and competitive market, net interest cost savings to borrowers may still exist, due to the signal conveyed by insurance coverage about the default probability of insured debt issues. The signaling hypothesis suggests that, although the direct benefits of bond insurance purchase such as enhanced credit quality and marketability may be offset by the premium incurred, borrowers may enjoy indirect benefits through the signaling function of debt insurance, and this debt insurance signaling provides a basis for a positive net insurance benefit. Kidwell, Sorensen, and Wachowicz (1987) examine the benefits of insurance purchase and attribute the net interest cost savings observed in their data to the signaling function of debt insurance. The signaling argument of debt insurance provides a plausible explanation for why borrowers acquire bond insurance when the market is in equilibrium. Its implication that debt insurance is a valid signal of bond quality in the tax-exempt market, however, is debatable. In the current article, the authors find that complete debt insurance is not an informative signal and the purchase of debt insurance in and of itself cannot provide any signaling benefit to borrowers. (1) Therefore, any net interest cost savings due to the purchase of bond insurance should not be viewed as a result of signaling. Debt Insurance As a Quality Signal Thakor (1982) argues that third-party information producers provide unambiguous signals of seller quality. Such information producers expend resources efficiently to produce information about the quality of a product seller and recover the information production costs by selling their services to the product seller. Investors take the level of services purchased by a seller as a quality signal of the product, and pay a market price that reflects the true quality of the product. Viewing private bond insurers as third-party information producers, Thakor suggests that a property designed premium schedule will induce a borrower to obtain the right amount of insurance coverage which signals exactly the borrower's true probability of default, so that a priori imperfectly informed investors will be well informed in equilibrium. …

The Interest Cost Savings from Municipal Bond Insurance: The Implications for Privatization

Previous studies of privatization have considered the cost-effectiveness of privatizing more labor-intensive services. This study examines the effectiveness of public and private delivery of a more capital-intensive service: insuring municipal bonds against default. Credit enhancement for local government bonds is available from private insurance companies and from some state governments. Because of their reduced default risk, bonds backed by a third party should incur lower interest rates. This research considers two questions. Does a third party guarantee lower interest rates? Is private bond insurance more cost-effective than the credit enhancement programs of state governments in lowering interest rates?

Trading uncertainty and the cash-in-advance constraint

It is argued that when money and bonds are distinct and money yields a lower rate of return, the quantity of private bonds that is exchanged for money is a signal for demand in the near future. Therefore, competitive price setters who observe transactions in the capital market will find it easier to quote prices when money and bonds are distinct relative to the case in which money and bonds are perfect substitutes. In the example analyzed, imposing a cash-in-advance constraint leads to fewer price-setting mistakes and to a Pareto improvement.

The Interest Cost Effect of Private Municipal Bond Insurance

This paper examines the impact of private municipal bond insurance on the interest costs of local government bonds. Based on the examination of True Interest Costs of both guaranteed and non-guaranteed municipal bonds over a three year period, results indicate that, on average, the interest costs of guaranteed bonds are significantly less than costs estimated for bonds without such protection. Investors in insured municipal bonds seem to demand a greater risk premium for the insurance coverage as the underlying credit rating of the issue rises. The explosive post-war growth in the volume of new tax-exempt financing has generally been absorbed by domestic capital markets, except during periods of tight credit. The demand for high quality municipal issues during tight credit periods, accompanied by rising interest rates, generally creates an environment that limits the access of issuers with lower rated bonds to long-term funds having economically affordable rates that do not exceed statutory ceilings. One of several public and private responses to the problem of limited access to affordable municipal financing has been the development of private municipal bond insurance. This insurance assures investors that in the event of issuer default, bondholders will promptly receive the scheduled coupon and principal payments from the guarantor. Since 1975 the demand for municipal bond insurance has increased dramatically, due in part to shifts in investor perceptions of risk brought about by the New York City fiscal crisis and the realization that a number of other municipalities were also faced with serious financial difficulties. As more municipalities experience financial difficulties, private bond guaranty programs will become an increasingly important force in the market for taxexempt debt. Thus, it is essential that the effect of bond insurance on interest costs of guaranteed municipal bonds be examined. The intent of this study is to determine whether the use of private municipal bond insurance reduced interest costs to local government participants. More specifically, a central objective is to compare interest costs of guaranteed municipal bonds with the estimated interest costs of those same governmental units' bonds had they issued bonds without a guarantee. Results presented here indicate that, on average, the interest costs of guaranteed bonds are

THE INTEREST COST EFFECT OF PRIVATE MUNICIPAL BOND INSURANCE

This paper examines the impact of private municipal bond insurance on the interest costs of local government bonds. Based on the examination of True Interest Costs of both guaranteed and non-guaranteed municipal bonds over a three year period, results indicate that, on average, the interest costs of guaranteed bonds are significantly less than costs estimated for bonds without such protection. Investors in insured municipal bonds seem to demand a greater risk premium for the insurance coverage as the underlying credit rating of the issue rises. The explosive post-war growth in the volume of new tax-exempt financing has generally been absorbed by domestic capital markets, except during periods of tight credit. The demand for high quality municipal issues during tight credit periods, accompanied by rising interest rates, generally creates an environment that limits the access of issuers with lower rated bonds to long-term funds having economically affordable rates that do not exceed statutory ceilings. One of several public and private responses to the problem of limited access to affordable municipal financing has been the development of private municipal bond insurance. This insurance assures investors that in the event of issuer default, bondholders will promptly receive the scheduled coupon and principal payments from the guarantor. Since 1975 the demand for municipal bond insurance has increased dramatically, due in part to shifts in investor perceptions of risk brought about by the New York City fiscal crisis and the realization that a number of other municipalities were also faced with serious financial difficulties. As more municipalities experience financial difficulties, private bond guaranty programs will become an increasingly important force in the market for taxexempt debt. Thus, it is essential that the effect of bond insurance on interest costs of guaranteed municipal bonds be examined. The intent of this study is to determine whether the use of private municipal bond insurance reduced interest costs to local government participants. More specifically, a central objective is to compare interest costs of guaranteed municipal bonds with the estimated interest costs of those same governmental units' bonds had they issued bonds without a guarantee. Results presented here indicate that, on average, the interest costs of guaranteed bonds are

The Demand for Funds in the Public and Private Corporate Bond Markets

THE purpose of this paper is (1) to determine whether corporations' decisions to borrow in the public or private corporate bond markets are significantly influenced by yield differentials between the two markets and (2) whether the sensitivity of corporations to yield differentials increases with the relative ease with which they can borrow in either market. In recent years, the influence of interest rates on corporation financing decisions has received considerable attention in studies which have sought to identify the determinants of corporate external financing and the maturity composition of corporations' liabilities.' In none of these studies, however, can the signs of the interest rate variables in the regression equations be predicted. This is because the expectations hypothesis of the term structure of interest rates which these studies accept posits that interest costs will be equalized regardless of the maturity financing strategy a borrower adopts. As a result the credibility of the findings of these studies concerning the influence of interest rates on financing decisions must be questioned even when this influence was found to be significant.2 In contrast, yield differentials between the public and private corporate bond markets have a predictable effect on the distribution decisions of borrowers. Since nominal rates typically are higher in the private market, a decrease (increase) in yield differentials should encourage (discourage) the sale of private placements. In the aggregate, then, the percentage of corporate debt sold privately should be negatively related to yield differentials between the two markets. In section II, the variables which influence the supply of and demand for funds in the public and private markets -are identified, and supply and demand equations are formulated. Differences in the distribution process in the two markets as well as marketing constraints, limit the ability of some corporations to borrow in both markets, as described in section III. For the purpose of measuring the influence of yield differentials on distribution decisions, then, corporations are divided into three groups, based on their ability to borrow in both markets. The regression results are discussed in section IV. Only the demand equation is estimated since appropriate data on the supply of funds to the corporate market is not available. The estimation of demand by itself, however, produces biased estimates of the coefficient of yield differentials between the public and private markets. The direction of this bias is considered in section V. The major findings are that yield differentials have exerted a significant influence on the distribution decisions of most of the groups studied. Moreover, the sensitivity of corporations to yield differentials is an increasing function of the relative ease with which they can borrow in both the public and private markets. Finally, if supply and demand had been estimated simultaneously, yield differentials most likely would have exerted a stronger influence on the distribution decisions of borrowers. Received for publication November 29, 1972. Revision accepted for publication May 22, 1973. * This paper is based in part on a study of the private placement market by Shapiro and Wolf (1972). In Shapiro and Wolf (chapter 5), the variables influencing the supply and demand for public and private financing are discussed and the distribution patterns of different borrower categories are compared. This paper extends this analysis by estimating a demand equation for public and private financing and by measuring the sensitivity of different borrower groups to yield differentials between the two markets. T am indebted to Professors John Keith, Richard Rippe and Maurice Wilkinson of the Columbia Business School and to Professors Robert Glauber and John Lintner of the Harvard Business School for their helpful comments. This study was supported by faculty research funds of the Columbia Business School. 1 Cragg and Baxter (1970) attempted to determine the factors which influenced the timing and the size of bond financings of 129 industrial companies using a probit analysis. Bosworth (1971) and White (unpublished) explained the maturity composition of total corporate borrowing using the Federal Reserve's Flow-of-Funds data. 2 Only in White's study was the fraction of long-term-tototal debt issues significantly (and negatively) related to the relative cost of long-term financing.

The Private Bond Case as a Postponement of the Real Issue

The discussion which immediately follows a significant Supreme Court ruling often emphasizes its political and economic effects; and if any respectable chain of reasoning can be found serve the purpose, a decision expedient from an economic angle becomes correct from a legal point of view. Moreover, it is widely recognized that in the field of Constitutional Law the Court may escape the past without restricting the future by somewhat forced construction and a selection from among competing analogies. The existence of this process and the desire of the critic approve a practically desirable result combine minimize the importance of a single decision as a source of Constitutional Law. Yet in the long run the true significance of the case may prove be that it furnishes points of reference on which the Court, if it chooses, may later rely. Viewed in this latter sense, as a precedent for the future rather than a result socially desirable for the present, the case of Norman v. Baltimore & Ohio R. R.' is found contain many important implications which have passed unnoticed. In particular, if, as seems altogether likely, the process of extending federal powers continues, the necessary and proper clause and the Fifth Amendment as a substantive check thereon will inevitably become the focal points of a portentous struggle. An attempt will be made in the following pages subject the Norman case careful analysis with a special view these implications. The plaintiff's bond in this case provided that payment of principal and interest would be made in coin of the standard of weight and fineness existing when the bond was issued. A joint resolution of Congress declared invalid all contract provisions, past or future, which purported to give the obligee a right require payment in or a particular kind of coin or currency, or in an amount in money of the United States measured thereby. . . 2 The first section of Mr. Chief Justice Hughes' opinion deals with the interpretation of the clause in the bond. With the issues involved in this matter we are not here concerned. Suffice it say that, while discarding the theory that the contracts were for as a commodity, or bullion, the Chief Justice also denied by implication the contrary contention that they were for coin and nothing else. They were, he concluded, gold value contracts,