Credit derivatives have made it easier to separate the credit risk (the danger of default) of bonds from the interest rate risk.
The message was that they would be purposefully limited in aim, and that the core of any programme would be a debtor-led partial default - that is, the suspension of interest payments on the remaining debt and a repudiation of the terms of both Troika-brokered bailouts.
The kicker is that a confession of judgment typically includes a paragraph that introduces an escalated interest rate from the date of default.
The higher the risk of default on a promised stream of payments, the higher the lease or interest rate.
Fears of a world recession following Russia's default last autumn prompted the Fed to cut interest rates three times, by a total of three-quarters of a percentage point.
Issuers and bond underwriters, as well as many bondholders want to limit the calling of a default to a failure to make interest or principal payments to bondholders when they are due.
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But a unit of insurer XL Capital, which held some of ESP's junior notes, pointed to a different section of the contract, claiming that in the event of default all note holders would continue getting interest payments before dishing out any principal to BNP Paribas.
Because they have a higher risk of default, struggling companies must pay a higher interest rate to borrow money.
What really matters is whether the interest margin properly reflects the risk of default.
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Historically, the risk of default adds about 0.25% to the interest rate.
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.
World Acceptance funds itself through lines of credit from Wells Fargo and Bank of America, so those banks already have exposure to consumers with lower credit scores, who pay higher interest and pose a greater risk of default.
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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Not only does America earn interest on its contribution, but the risk of default is almost negligible.
Now, the obvious concern here is that it would also be in the interest of all bankers to try to correlate the default probabilities of their credit instruments so that they all default together and thus trigger the guarantee.
Zivney and Marcus examined what happened to T-bill interest rates as a result of this small, temporary default.
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Two problems here: The buyer might default, and a portion of each deferred payment is treated as highly taxed interest income.
Making interest payments out of debt reserve funds only disguises a default.
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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.
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.
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.
LTCM, a hedge fund, collapsed when interest rates suddenly shifted after Russia's default in the summer of 1998.
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.
It was considered the supportable ceiling for sovereign debt in the old days of higher interest, but current 100% levels of debt to GDP require low interest rates or the sovereign goes into default.
We have seen in recent days and weeks a number of Republicans and a number of interest groups allied with Republicans make clear their position that flirting with default is a disastrous idea, it is a terrible idea.
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.
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.
This sets off a death spiral of falling GDP, rising unemployment, and rising interest rates, which eventually leads to default.
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In the case of insured bonds, where the interest payment is funded by a bond insurer or letter of credit issuer, the default is still the same.
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It was unable to raise money on international bond markets due to the massively high interest rates demanded for its bonds a reflection of the high risk of default that investors see in Greece.
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