The decision by the Fed to offer emergency liquidity to Bear Stearns and to facilitate its acquisition by JPMorgan Chase had less to do with the size of Bear's balance-sheet than with its central role in markets for credit-default and interest-rate swaps.
Credit derivatives have made it easier to separate the credit risk (the danger of default) of bonds from the interest rate risk.
To reduce interest-rate and default risk, Ms. Benz suggests sticking with intermediate-term muni-bond funds with a high percentage of their holdings in general-obligation bonds, which are repaid with tax revenue.
All cleared OTC derivatives will be available including interest rate swaps, credit default swaps, energy swaps, non-deliverable forwards and equity swaps.
We are working with customers because it is meant to bring a lot more transparency, a lot more reporting, much more in market data flows, a lot more storage of trading records for longer and it brings into its orbit a lot of esoteric instruments like interest rate swamps, credit default swaps and collateralized debt obligations.
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So we really are into triple digit interest rates just to cover the default rate alone.
Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money.
The kicker is that a confession of judgment typically includes a paragraph that introduces an escalated interest rate from the date of default.
Although the investments resembled bonds, paying buyers a fixed interest rate for taking on the default risk of corporate debt, the products invested in synthetic collateralized debt obligations held by Lehman.
In some cases, the interest rate can be higher than the default rate on other credit cards.
Historically, the risk of default adds about 0.25% to the interest rate.
The simultaneous contracts could be arranged to replicate any agreed interest rate while providing legal protection against default on one side and loan sharking on the other.
Actions such as selling credit default swaps based on rotten loans, money laundering, interest rate manipulation, and excessive risk-taking can be as objectively determined as financial restatements.
At present, most high-yield companies are covering their interest, as evidenced by the U.S. default rate.
And others may judge that an interest rate big enough to compensate for the risk of default would only add to the pressure on Greece, making default more likely.
But it's tough for low-income families to qualify for these loans in the first place (they often require a co-signer), and the interest rate offered will depend in part on the average default rate of students at the school a child attends.
Spanish banks like Santander and BBVA hold more than 40% of the outstanding sovereign debt of Portugal (valued at about 60 billion euros), which carries an eye-wateringly high interest rate reflective of the risk that the county will default on some of its payments.
The higher the risk of default on a promised stream of payments, the higher the lease or interest rate.
It indicates that the government is a higher risk for default, and lenders will subsequently demand a higher rate of return with higher interest rates.
But given the implication of higher risk of default, it ought to follow that a lower credit rating would also mean a higher interest rate.
Just as in the past, high yield bonds trade at an interest rate spread over Treasury bonds, which are more liquid and less subject to default risk.
As default risk is the primary driver of high-yield corporate bond prices, as opposed to interest rate direction, when the economy expands, the risk of high-yield corporate bonds defaulting is reduced and this is reflected in lower volatility.
The CARD Act changed the notification requirements for interest rate hikes, requiring that cardholders now receive 45 days notice on any increase, including default.
Fearing all markets could soon fall, El-Erian injected what he referred to as "Armageddon insurance" into HMC's portfolio for the first time by buying interest rate floors, or a wager that rates would fall, and betting, via credit default swaps, that companies could soon struggle to pay their debts.
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